“The question of whether XRP is a security will be crucial”: CFTC Commissioner on regulatory clarity

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Commissioner Stump concluded by saying regulators must enable innovators to think creatively and acknowledge there will be differences of opinion as to the utility and potential of various products. 

Commissioner Dawn D Stump has expressed the CFTC’s attention to the lawsuit filed by the SEC against Ripple Labs and its co-founders for having sold more than 14.6 billion XRP tokens worth $1.38 billion in an unregistered offering, according to the complaint.

“The question of whether XRP is a security will be crucial. XRP is similar to bitcoin and other digital assets but also different in key respects, which prompted the SEC’s investigation. Bitcoin was an open software project launched by a pseudonymous creator calling himself Satoshi Nakamoto. XRP was created, sold initially, and backed by the company known as Ripple.

“I am watching the outcome of this case closely because it will help to establish the scope of the SEC’s authority in the digital assets space”, Commissioner Stump said, drawing attention to SEC Commissioner Hester Peirce’s work regarding the application of the “Howey test” to digital assets, which provides the framework for determining whether certain assets are securities.

“I am encouraged by her attempt to create a safe harbor that recognizes both ‘the need to achieve the investor protection objectives of the securities laws, as well as the need to provide the regulatory flexibility that allows innovation to flourish.’ I look forward to working with Commissioner Peirce, incoming SEC Chairman Gary Gensler, and the other Commissioners at the SEC and CFTC in applying the agencies’ authorities to develop sound public policy with respect to digital assets”, the CFTC Commissioner added.

Commissioner Stump concluded by saying regulators must enable innovators to think creatively and acknowledge there will be differences of opinion as to the utility and potential of various products.

The SEC has recently welcomed its new Chair, Gary Gensler. Described as “one of the leading reformers after the financial crisis”, he will now lead the regulator in a time of crisis.

The financial watchdog has been under fire for not providing clarity regarding its authority over the cryptocurrency ecosystem, with the most recent scandal being the SEC v Ripple lawsuit.

John E. Deaton, Managing Partner at The Deaton Law Firm and lawyer for approximately 11,000 XRP holders in the context of the SEC v Ripple lawsuit, has stated that the regulator is misleading the court.

According to Mr. Deaton, the SEC is making a case against all XRP transactions from 2013 to the present day and this is was made clear in court during a March 12 hearing, where SEC prosecuting attorney Jorge Tenreiro said: “every sale is a violation.”

CFTC’s regulatory authority over digital assets

Commissioner Dawn D Stump has clarified the regulatory scope of the CFTC before Texas A&M’s bitcoin conference.

After naming a few of the federal and state regulators that also have an interest in bitcoin, including the SEC, OCC, FinCEN, she explored the CFTC’s regulatory authority over Bitcoin et al.

“Commodity” is generally defined as goods “in which contracts for future delivery are presently or in the future dealt in.” The regulator’s scope includes futures contracts in any commodity, swaps, as well as certain leveraged retail foreign exchange contracts. The CFTC has determined that bitcoin fits the legal definition of a “commodity” under the CEA.

“Even though the CFTC has exclusive jurisdiction to regulate futures on commodities, other regulatory bodies may be on the frontline of regulating the underlying commodity itself. For example, the CFTC regulates futures and swaps on interest rates, but the Federal Reserve Board of Governors manages the level of short-term interest rates through its monetary policy”, said Commissioner Stump.

“I want to be very clear that the CFTC regulates derivatives associated with the underlying commodities, but not the underlying commodities themselves. In other words, we regulate futures on bitcoin because bitcoin is a commodity—but we do not regulate bitcoin itself, much like we regulate cattle futures because cattle are commodities, but we do not regulate the sale of cattle at auction barns throughout the country”, she added.

As for the need for clarity, the CFTC Commissioner is concerned the public has the impression that the CFTC is the frontline regulator of cash digital asset markets, giving them a false sense of security when engaging in transactions on cash digital asset trading platforms.

“The public should be aware that where cash commodity markets are concerned, limited enforcement authority (anti-fraud/manipulation, as opposed to day-to-day regulatory oversight) is bestowed upon the CFTC as a tool to assist in its primary function of regulating derivatives products, such as futures. However, we are not in the business of regulating bitcoin transactions or the individuals or entities that buy, sell, transfer, or store bitcoin”, she explained.

As far as the process for listing futures on digital assets, any new product on a CFTC-regulated exchange can self-certify compliance with the CEA and CFTC regulations and list the product for trading the following day or, alternatively, request that the CFTC approve a new product prior to listing.

“Some have called into question the self-certification process—and I am always interested in suggestions about how we can make the process more workable. I also would note the responsibility that rests with the exchanges to help assure that the certification process works effectively. But I would caution against dismissing or judging the self-certification process without an eye towards why it exists in the first place, and whether it is preferred to other models in the context of ever-evolving and innovating financial markets”, she said.

Commissioner Stump has recently commented on the case against Coinbase and while, concurring with the regulator’s findings, she expressed her “serious concerns about the Commission’s dedication of resources to this matter involving an exchange for cash transactions in digital assets”.

The Commissioner agreed that Coinbase is liable for reporting false trading information and for wash trading performed by a former employee, but the CFTC does not regulate cryptocurrency exchanges.

FinanceFeeds has recently reported on the $6.5 million settlement between Coinbase and the CFTC. Coinbase was found liable for false reporting of trading data, which may have misled the wider crypto market in its price discovery and perception of liquidity.

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