The Role of Commodity Futures Trading Commission (CFTC) in Regulating Cryptocurrency

Beginner’s Guide / 02.07.2020

The Commodity Futures Trading Commission (CFTC) is a US-based agency established by the Commodity Futures Trading Commission Act of 1974 for regulating the commodity futures and derivatives markets, including option markets, futures, and Swaps. 

The commission’s main goal is to promote futures markets’ competitiveness and efficiency while protecting traders against unscrupulous activities, fraud, and abusive trade practices. 

CFTC has five committees; Agriculture, Global markets, Technology, Energy & environmental markets, Coordination between the CFTC and SEC, each headed by a commissioner. The commissioners are nominated by the POTUS and then approved by the Senate. 

Regulating Cryptocurrency: How it All Started

Regulating a cryptocurrency is not only vital but also a challenge. Unlike traditional fiat currency, the peer-to-peer, the distributed ledger doesn’t involve a centralized authority responsible for issuing new currency or approving payments. Instead, with cryptos, these responsibilities are taken care of by the network itself. Besides, blockchain technology allows network participants to remain anonymous or at least pseudonymous.

The nature of cryptocurrency opened a window for illicit use to facilitate sanctions, trafficking, and money laundering. Also, there was a rise in fraudulent schemes used to make money through crypto market manipulation. Pump and Dump is a great example of these schemes.

The swelling number of illegal crypto activities fuelled the need for regulation to protect investors and other participants in crypto markets. That’s how the Commodity Futures Trading Commission (CFTC) found its ways into cryptocurrency in 2015.

CFCT and Cryptocurrency

The CFTC plays an important role in regulating cryptocurrency within the following jurisdictions:  

Consumer Education – This involves enlightening the public and crypto market participants on matters concerning cryptocurrencies.

Market Intelligence – The CFCT monitors cryptocurrency markets to collect and analyze data for insights used in making regulations and enforcing them to make crypto markets secure. 

Government-wide Coordination – The CFTC is responsible for coordinating other institutions involved in cryptocurrency regulations such as Securities and Exchange Commission (SEC) Federal regulators, Justice Department, and Financial Stability Oversight Council (FSOC) and other state entities, including Attorneys General, White House, and policymakers.

Intermediaries Oversight – The Department of Swap Dealer and Intermediary Oversight (DSIO) oversees crypto market intermediaries, including brokers, futures commission merchants, commodity pool operators, commodity trading advisors, and swap dealers.

Although the Commission has limited jurisdiction in international markets, CFTC works with foreign bodies, like the UK’s FCA, to help them achieve certain goals, for instance, through Red Lists. 

The Case for Cryptocurrency

For a long time, CFTC has been widely involved in regulating commodity product-related features and options contracts. The 21st century is, however, introducing new challenges with the coming of the digital age.

One of the biggest challenges that faced CFTC was determining whether bitcoin is a commodity or just a currency. The proper classification of cryptocurrencies is a complex legal issue and has attracted several legal battles.

In 2015, for example, the Commodity Futures Trading Commission officially classified Bitcoin as a commodity. This classification puts Bitcoin in the same category as gold. Despite the issue finding its way to the courts, the decision has been upheld several times.

The categorization of Ether as a commodity later in 2019 confirmed that CFTC recognizes all cryptocurrencies as commodities. The commission’s chairman Heath Tarbert confirmed this in his statement at Yahoo! Finance 2019 All Markets Summit, “We’ve been very clear on bitcoin: bitcoin is a commodity. We haven’t said anything about Ether – until now,” Tarbert said. “It is my view as chairman of the CFTC that ether is a commodity.”

The Sanctions, Actions, and Way Forward

Having categorized cryptocurrencies as commodities, the CFTC embarked on enforcing actions over frauds and non-compliant activities. The CFTC crypto sanctions focus on frauds and failure to register with the commission. This has seen several actions taken by CFTC to ensure compliance with their ‘commodity’ standards. 

For example, the commission recently filed fraud charges against a Colorado citizen and an investment company. According to a Feb. 14 statement by CFTC, the accused, Denver local Breonna Clark, and Colorado-based Venture Capital Investments Ltd. Face charges of defrauding investors.

In addition to fraud, CFTC has also endeavored to prevent crypto companies from not securing registration with them. For example, the recent charges against SARL d/b/a First Global Credit (FGC), a Switzerland-based XBT Corp., for failing to register with the agency as a futures commission merchant (FCM).

These examples represent the many actions CFTC has been taking against cryptocurrency companies and individuals who have refused to adhere to CFTC regulations. Looking forward, the sanctions are bound to tighten as the commission increasingly liaises with other regulators, e.g., SEC.

Final Thought

The CFTC has maintained its track record in regulating financial markets. The commission plays an important role in protecting investors and ensuring fairness in the markets. CFTC has recently positioned itself as the chief regulator of cryptocurrency. 

Its actions against fraudulent activities have improved public trust in the industry. Therefore, before you register with your brokers or exchanges, it is good to do a background check of their registration status with CFTC. You can achieve this by just filling several required details in a form available on the CFTC website.

Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.