March 15, 2022
Although the digital currency Bitcoin was already introduced in 2009, central questions of allocation are still under discussion and are of particular concern to the supervisory authorities. In the U.S., for example, a jurisdictional dispute has erupted between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
Transactions executed in online currencies are difficult to monitor because there is no intermediary (usually a bank) as in the classical sense. Instead, with cryptocurrencies, the necessary data is stored in a blockchain at the various nodes, enabling users to act anonymously. It is precisely this anonymity that makes cryptocurrencies very attractive for money laundering and other criminal activities. Some countries have therefore tried to ban cryptocurrency trading. These attempts are considered to have failed. Instead, the current focus is on better protecting investors from criminal abuse.
Two relevant authorities in the United States are currently arguing about how this can be done: the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). At the center of the dispute is the question of whether blockchain-based assets should be treated as commodities or securities and, as a result, which authority should be allowed to claim jurisdiction.
Cryptos as a commodity
The Commodity Futures Trading Commission (CFTC; responsible for futures and options markets) in particular argues that cryptocurrencies should be treated like commodities. This is justified by the fact that the maximum number of Bitcoin coins is limited to 21 million. Thus, it is a finite resource whose value is expected to increase in the long term. This claim is also supported by the currently prevailing investor structure. For the most part, investors are found here who speculate on rising prices. Among other things, this leads to the fact that prices in this segment are very volatile, which is also typical for commodity markets. Crypto assets are traded decentrally by providers that are not regulated. This makes it difficult to monitor by means of banking regulation. Here, the CFTC sees itself at an advantage due to its experience with the trading of options and futures in the commodities sector.
Cryptos as a security
On the other side is the Securities and Exchange Commission (SEC), the authority that oversees stock exchange and securities trading in the United States. The SEC has admitted that Bitcoin, Etherum and other cryptocurrencies are not securities in the traditional sense. Nonetheless, the SEC claims jurisdiction over the regulation of cryptocurrencies. It argues that it is predestined to oversee the service providers that stand at the interface between the platforms and the buyers of the coins. For example, newly issued cryptocurrencies so-called Initial Coin Offerings (ICO) would fall under the sovereignty of the SEC. These are already a long time ago for the currently already established cryptocurrencies. However, as this is a rapidly growing market, further currencies will be added in the future whose launch is associated with an ICO. There are many opportunities for the SEC to become active as a regulator.
Another aspect that speaks in favor of giving the SEC the responsibility to intervene in a regulatory manner is the so-called Decentralized Finance (DeFi). These are platforms that allow users of cryptocurrencies to borrow funds from each other, offer insurance or trade in financial products. The underlying contracts are also verified via blockchain technology in the process. Since lending and borrowing of monetary funds, as well as being among traditional banking services, DeFi provides a strong argument that the SEC should be responsible for regulation.
In our assessment, cryptocurrencies defy simple assignment to a clear asset class. Accordingly, it cannot be clearly assigned to an authority. Even though cryptocurrencies are similar to commodities at their core, it can be assumed that the SEC will play an important role in this field. The fact that it starts at the crucial points of the market also speaks strongly in favor of the SEC.
Finally, the SEC's globally recognized authority weighs heavily in this debate. The fact of belonging to a regulated market is widely regarded as a mark of quality.
Bitcoin, meanwhile, is making inroads into new areas. For example, El Salvador has recognized it as an official currency since last year. In the long term, therefore, new definitions may be needed in addition to the classic ones, which could also lead to the creation of new regulators that deal exclusively with crypto assets.
Cryptocurrencies will continue to grow in importance. It is even more important that regulators take a clear position and take action against crypto-based money laundering.
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About the Author:
About the author: Karl Eugen Reis has been a consultant at CURENTIS AG since 2021 and has extensive project experience in the area of financial services and anti-financial crime. In addition to these activities, he has participated as an assistant in a number of projects in auditing, including an Asset Quality Review (AQR) in preparation for the European Central Bank's bank stress test.