CFTC Chair Asserts At Least 70% of Crypto Assets Are Not Securities

The Commodity Futures Trading Commission (CFTC) is seeking to increase its jurisdiction over digital assets.

During testimony before the U.S. Senate on Wednesday, Rostin Behnam, Chair of the CFTC, argued that Bitcoin, Ethereum, and other cryptocurrencies should be considered commodities and not securities.

According to Eleanor Terrett, a reporter for Fox Business, Behnam estimated that between 70% and 80% of crypto assets comprise “non securities” assets.

Behnam noted that earlier this month, a federal court recently ruled in favor of the CFTC bringing charges against a $120 million Ponzi scheme. Significantly, the judge determined that BTC, ETH, and two obscure altcoins — Olympus (OHM), and KlimaDAO (KLIMA) — comprise digital commodity assets.

“Cryptocurrencies share a ‘core characteristic’ with ‘other commodities whose derivatives are regulated by the CFTC,'”Judge Rowland said. “These factual similarities… allow the CFTC to expand its jurisdiction from ‘future’ contracts for commodities to ‘spot commodity fraud’.”

Behnam also asserted that the priority for regulators concerning digital assets should be regulating centralized exchanges, rather than going after DeFi. “I’m a firm believer there is a regulatory nexus for DeF, but perhaps we have to take a unique look given the unique nature of it,” he said.

The CFTC chairman urged Congress to give the agency more authority over the crypto sector, including domain over the spot cryptocurrency sector.

“In the fiscal year 2023, actions involving digital asset-related allegations comprised almost half of our enforcement docket,” Behnam said. “Of the 47 enforcement actions involving digital assets commodities, 35 alleged misconduct in the spot market.”

Why It Matters

The classification of cryptocurrencies as either securities or commodities has significant implications for the regulation of the digital asset sector.

Securities are investment contracts, including stocks, bonds, and derivatives. They represent an ownership position in a publicly traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.

The Securities and Exchange Commission (SEC) oversees the regulation of securities in the U.S. The Howey Test, from a landmark 1946 case, is used to determine if a transaction qualifies as an investment contract (and thus a security). If an investor expects profits primarily from the efforts of others, the asset is considered a security.

Commodities, on the other hand, include raw materials and primary agricultural products that can be bought and sold, such as gold, wheat, or oil. The CFTC regulates commodity trading. Commodities are typically interchangeable with other goods of the same type, making them “fungible.”

If a cryptocurrency is deemed a security, issuers and exchanges must comply with strict SEC regulations. This includes registering the asset and adhering to extensive disclosure requirements to protect investors.

However, if a cryptocurrency is classified as a commodity, it falls under the purview of the CFTC. This generally means less stringent regulations compared to securities. While the CFTC currently has limited authority over spot trading, it acts against fraud and manipulation in the broader commodity markets.

SEC vs CFTC

Tensions have recently arisen between the CFTC and SEC regarding the regulation of crypto assets, despite the two regulators appearing to see eye-to-eye.

In January 2018, the CFTC and the SEC issued a joint statement on combat fraud in the digital currency markets. The move came one month after regulated Bitcoin futures products launched under the regulatory purview of the CFTC.

In June 2018, William Hinman, head of the SEC’s Division of Corporate Finance, declared that both Bitcoin and Ethereum were sufficiently decentralized enough to comprise commodities.

In February 2020, CFTC Chairman Heath Tarbert asserted that both Bitcoin and Ether are commodities. “We’ve been very clear on Bitcoin: bitcoin is a commodity under the Commodity Exchange Act, Tarbert said. “We haven’t said anything about Ether – until now. It is my view as Chairman of the CFTC that Ether is a commodity.”

In February 2021, regulated ETH futures launched on the Chicago Mercantile Exchange under the CFTC’s oversight.

Regulation by enforcement

When Gensler took the helm of the SEC in 2021, the agency started taking a more aggressive approach to the crypto sector. While the chairman reaffirmed that Bitcoin comprised a commodity in 2022, the SEC has increasingly waged a campaign of regulation-by-enforcement targeting other web3 assets since Gensler’s appointment.

In February 2023, the SECreached a $30 million settlement with Kraken over its crypto staking program. This move underscored the SEC’s determination to enforce securities laws on staking services. In March 2023, the SEC issued a Wells Notice to Coinbase. In June 2023, the SEC filed a lawsuit against Binance.

Ethereum also emerged as an issue of contention for the two regulators in 2023, with the CFTC regulating futures products as commodity assets while the SEC increasingly appeared hell-bent on classifying ETH as a security.

In April 2024, Consensys, a U.S.-based blockchain software company, sued the SECin a bid to attain a court ruling that ETH is a commodity. The legal proceedings revealed that the SEC had launched a secret investigation into whether Ethereum is a security in March 2023. That same month, Gensler asserted that all Proof of Stake assets resemble securities.

Amid the backdrop of the SEC’s increasing hostility towards ETH, Behnam sought to reaffirm the CFTC’s position that Ethereum comprises a commodity during a Senate Agriculture Committee hearing in March 2023.

In March 2024, Behnam warned the SEC’s apparent position that Ether is a security threatened to place CFTC-regulated exchanges that list Ether as futures contracts in “non-compliance of SEC rules” despite also adhering to CFTC guidelines.

Amid the backdrop of increasing backlash, the SEC greenlit spot Ethereum exchange-traded funds (ETFs) in May 2024, signaling that ETH comprises a commodity and not a security. The following month, Consensys said that the SEC had capitulated and dropped its investigation into Ethereum.

Court rules against the SEC

The SEC’s regulatory crusade against crypto was also recently dealt several blows from U.S. courts.

In July 2023, Judge Analisa Torres ruled that XRP is not inherently a security investment contract while presiding over the SEC’s lawsuit against Ripple. The judge crucially determined that crypto assets are not in and of themselves securities assets, even when primarily distributed through a securities offering — meaning that cryptocurrencies traded on secondary markets are not securities.

On June 28, Judge Amy Berman Jackson of the District Court for the District of Columbia also dismissed charges relating to secondary cryptocurrency trades brought against Binance by the SEC. The SEC tossed charges alleging that secondary sales of Binance’s BNB token and BUSD stablecoin constituted the distribution of unregistered digital asset securities, despite allowing charges concerning the primary BNB initial coin offering to move forward.

Judge Jackson cited Torres’ ruling in the Ripple case as informing her determination.

The Court notes that several of the district courts presented with SEC enforcement actions involving cryptocurrencies have taken pains to differentiate the alleged investment contracts from the tokens themselves,” Judge Jackson said. “In the court’s view, then, the SEC’s suggestion that the token is ‘the embodiment of the investment contract’ as opposed to the subject of the investment contract, muddied the issues before the Court.”

On July 3, the federal court ruling designating OHM and KLIMA as commodities also appeared to pave the way for the CFTC to expand its jurisdiction over the crypto sector.

Related: SEC Targets Ethereum Liquid Staking