Is the CFTC expanding its powers over unauthorized crypto?

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Amid explosive growth in digital currency markets and a corresponding increase in misconduct plaguing the industry, the Chairman of the Commodity Futures Trading Commission, Rostin Behnam, recently asked Congress to expand the powers of execution of the CFTC and said the agency stood ready to serve as the “lead cop on the beat” for the cryptocurrency markets. This demand implicitly acknowledges that the CFTC currently lacks the power to lead the way in policing misconduct in digital currency markets – a finding supported by the Commodity Exchange Act (“CEA”), the law of which the CFTC derives its enforcement powers. . Yet even as the agency appeals to Congress for expanded regulatory authority, the CFTC has behaved as if it already wields broad jurisdiction to monitor misconduct in digital currency markets.

Meanwhile, Gary Gensler, chairman of the Securities and Exchange Commission, took advantage of a public speaking tour in recent months to report that the SEC already sees itself as the “top cop on the beat” for the markets. digital currencies. For its part, the Department of Justice recently announced the launch of its own “National Cryptocurrency Enforcement” team. Not to be outdone, other federal law enforcement agencies, including the Financial Crimes Enforcement Network (FINCEN), the Office of Foreign Assets Control (OFAC) and the Internal Revenue Service, have joined forces. also rushed to the forefront to control the cryptocurrency industry.

What is happening here? The stacking of law enforcement agencies may, in part, be explained by the high incidence of fraud, money laundering, and – perhaps most critically – the widespread victimization of ordinary Americans in cryptocurrency schemes from all sides. But this is not the only driving force. Just as law enforcement agencies apply the old ‘follow the money’ maxim to guide investigations, anyone trying to understand why, apparently, every American agency is trying to position itself as the workhorse of the derby. application of cryptocurrency.

Clearly, the explosion in cryptocurrency investment and business has caught the attention of the nation and, by extension, its representatives in Congress. And wherever Congress focuses its attention, taxpayer dollars – and expanded agency mandates – tend to follow. So, the enforcement agency that succeeds in presenting itself as the best positioned to deal with the rising tide of fraud and misconduct emanating from the cryptocurrency industry should receive an increased budget from Congress – and perhaps an increased power of application to accompany it.

For the CFTC, an enforcement agency that typically receives a much smaller share of the federal enforcement budget compared to its peers in the SEC and the Department of Justice, the explosive growth of the cryptocurrency industry provided a golden opportunity to improve its budget and expand its scope of delivery. Undoubtedly acknowledging that congressional perception drives fiscal reality, the CFTC appears to be laser-focused on wielding its enforcement capabilities and asserting broad jurisdiction in digital currency markets. But this public posture masks a fundamental vulnerability of the CFTC executing authority, namely the absence of a clear statutory basis for the authority it claims to assert.

Although apparently limited by law to cracking down on fraud and manipulation in the futures markets, the CFTC has long sought to expand its jurisdictional reach by asserting that its authority extends not only to goods and products making the contract. object of future exchanges today, but also to any good or product that could one day be the subject of future exchanges. Even within the CFTC, however, attempts to aggressively expand the agency’s enforcement power generated significant opposition, such as when CFTC Commissioner Bart Chilton called the broad definition of l agency of the commodity as “circular” and sufficient to render the statutory limits of the ECA “meaningless”.

Despite this internal opposition, over the past five years, the CFTC has used a combination of pro se litigation, consent orders and public announcements to create a perception of broad authority over digital assets and reconcile its aspirations. jurisdictional reality. For example, in 2017, the CFTC used enforcement action against unrepresented parties to obtain a consent order characterizing Bitcoin as a “commodity in interstate commerce”. Likewise, in 2018, the CFTC used another pro se litigation to set a favorable precedent for its broad characterization of digital currencies as “commodities.”

After crossing this critical threshold, the CFTC then relied on that “precedent” to launch a multi-year enforcement blitz targeting a wide range of cryptocurrency activities, thereby strengthening its public position as a leader in the industry. application of cryptocurrency along the way. Rather than engaging in protracted – and costly – enforcement battles with the U.S. government, many investigative targets have chosen the path of least resistance, giving in to CFTC claims and submitting to lawsuits. consent orders that only serve to strengthen the CFTC’s claim to broad jurisdictional authority. Through parallel press releases and speaking tours, the CFTC has used its success to cajole these resolutions and roll over unrepresented litigants to promote its public position as the primary enforcer of crypto-related misconduct. -coins.

Indeed, the CFTC has relied on a snowball effect largely on its own initiative to generate greater leverage on enforcement objectives in order to obtain increasingly striking sanctions, despite its precarious jurisdictional basis. For example, in the recent Bitmex controversy, the CFTC (one way or another) persuaded five targets to pay a fine of US $ 100 million for illegally operating a trading platform and alleged violations of the fight against money laundering. At the time, Acting President Behnam presented the resolution as reinforcing “the expectation that the digital asset industry … takes seriously its responsibilities in the regulated financial sector and its duties to develop and adhere to a culture of compliance”.

But even as the CTFC aggressively expands its digital currency enforcement campaign, questions and skepticism about the agency’s jurisdictional authority to conduct such a campaign stubbornly persist. Indeed, as recent statements by Commissioner Dawn DeBerry Stump in the Tether and Bitfinex settlement illustrate, the agency’s overbreadth designed to create the perception of a pervasive ‘beat cop’ comes with it. significant drawbacks, including inducing investors to operate with a false sense of security in markets outside the traditional jurisdiction of the CFTC. Additionally, the CFTC’s rush to take action in the absence of any clear statutory authority adds another layer of confusion to an already opaque regulatory environment that plagues digital currency markets.

Ultimately, as digital currency continues to soar towards mainstream adoption, it’s hard not to admit that the inevitable increase in fraud and other bad behavior matches this explosive growth. will require additional application resources. And given its experience in monitoring markets populated by unregistered trading companies and sophisticated algorithms in derivatives markets, the CFTC may have good reason to position itself as the most logical choice for a broader authority to lead enforcement efforts in digital currency markets. But unless and until Congress acts on Acting President Behnam’s request for an expanded statutory mandate (and budget) to lead the charge, cryptocurrency exchanges and traders that fall. Finding the wrong side of a CFTC enforcement investigation should not be so quick to admit that the agency has the necessary jurisdictional authority to act.

For now, the CFTC’s jurisdictional theories in this area remain largely untested – at least in a material sense. With the help of experienced lawyers accustomed to challenging the theories of the CFTC, savvy investment targets can – and should – take advantage of this uncertainty to achieve much better results than it seems. possible based on the headlines of recent years.

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