- If digital assets are classified as securities, it means more restrictions, something feared could hinder innovation in the sector.
- It is part of a broader debate as the industry regulators move to tame volatility and protect investors.
The Commodity Futures Trading Commission (CFTC)’s hearing before the Senate Agriculture Committee Wednesday was dominated by the discussion around digital assets. The commission took a firm stance against the SEC regarding the classification of Ether and Stablecoins.
CFTC chair, Rostin Behnam, told the committee that the second largest cryptocurrency was a commodity since it has been listed on CFTC exchanges for quite a while and that it was the right authority to police its derivatives and the underlying markets. Responding to Sen. Gillibrand, Behnam told the hearing that his commission had considered all the litigation and credibility risks in the classification.
Security or commodity: why the classification matters
Suppose an asset is classified as a security. In that case, it is subject to additional regulatory requirements, something experts believe, in the case of Ethereum, could hinder the growth of the blockchain and the many projects building on it. Such classification also compels the regulated security to comply with the relevant reporting and registration standards provided under the Securities Act of 1934.
On the other hand, if Ether is classified as a commodity, it means fewer restrictions and growth potential. SEC’s argument for classifying Ether as a security is based on how the project was funded – through an Initial Coin Offering (ICO). During the ICO, the agency claims investors bought the token anticipating a return, a test for determining security called the Howey test.
Behnam also sharply disagreed with the position of the SEC’s chair Gary Gensler that all digital assets except bitcoin are securities because the “forks buying them are anticipating profits, and a small group of entrepreneurs and technologists are nurturing the projects.”
CFTC’s stance on stablecoins
Citing a 2021 settlement with stablecoin issuer Tether, where the commission fined the platform $41 million on the allegations that it misled investors that fiat currencies fully backed USDT stablecoin, Behnam maintains his position that stablecoins also fall under its oversight as commodities.
“Notwithstanding a regulatory framework around stablecoins, they are going to be commodities, in my view,” he said. “I know colleagues might have a different opinion, but we’ve done the legal analysis and examined the circumstances around the Tether case. It was clear to our enforcement team and the commission that Tether stablecoin was a commodity, and we needed to move forward and swiftly to police the market and the company.”