Newly elected US President Donald Trump has offered a potentially revolutionary approach to cryptocurrency regulation, favoring the Commodity Futures Trading Commission over the Securities and Exchange Commission as the new crypto regulator in the USA.
Trump had earlier charged the SEC of leading a crusade of the Biden administration against crypto companies. He had earlier promised to fire Gary Gensler as the SEC chief in an attempt to provide fair crypto regulations.
Taming The Aggressive SEC
Lately, the SEC has brought several cases against crypto companies, often charging them with violations of security laws despite no clear regulation on whether crypto is a security.
- Ripple Labs is embroiled in court over whether XRP should be classified as a security.
- Uniswap was charged with offering unregistered securities through its decentralized exchange.
- MetaMask has been targeted as well, charged as an exchange for their decentralized wallet services.
Even Trump has criticized the SEC’s approach as not tight-fitting and innovation-insensitive. He’s even warned that if elected, he’ll fire the head of the SEC. For the record, SEC chief Gensler has already announced his resignation date: January 20, 2025, i.e., the Inauguration Day for the Trump administration.
Why Gensler’s Resignation Is Important?
Gensler’s resignation seems to be time-bound. Two possible reasons seem almost certain behind his resignation have been speculated on.
Avoiding Dismissal: Gensler’s resignation might be an anticipatory step to prevent a direct dismissal by Trump or any other incoming administration that opposes his policies.
Increasing Criticism: The SEC’s strong-arm tactics against crypto companies have drawn criticism from the industry, investors, and lawmakers, which could lead to internal pressure for his resignation. The SEC currently consists of three Democrats (including Gensler) and two Republicans.
Trump’s Preference for the CFTC
Trump’s inclination to the CFTC and away from the SEC is simply due to their basic functioning. The CFTC has historically been a commodities and derivatives-focused agency and tends to be more lax in regulation than the SEC, which is characterized by very stringent rules and many enforcement actions.
The proposed FIT21 Financial Innovation and Technology for the 21st Century Act attempts to create an equal balance between the two, as proposed:
- The CFTC should regulate centralized cryptocurrencies.
- The SEC should regulate decentralized assets.
- Both agencies should jointly regulate crypto exchanges.
However, Trump seems to favor the CFTC as being more suitable to house most of the crypto oversight. He believes this would give a clearer set of rules and a friendlier environment for innovation as compared to the SEC’s move to classify many cryptocurrencies as securities.
Implications of CFTC Regulation
If he succeeds in framing the CFTC as the chief regulator, the cryptocurrencies most likely would fall under commodity, like gold or oil. This would mean classification and has various implications on:
Simpler Regulation: The commodity regulations focus more on market integrity and the prevention of fraud than the stricter registration and disclosure that securities require.
Lower Compliance Costs: This means fewer administrative burdens on projects and fewer hurdles for startups and developers.
Broader Adoption Potential: The removal of securities classification may create a more accessible and innovative ecosystem for the U.S.
Definition of a Security by the SEC
The Securities Act of 1933, drafted by the SEC, defines securities. It is a broad act, ranging from stocks and bonds to investment contracts. Many cryptos tend to be labeled as “investment contracts,” causing many disputes over their regulation.
Applying the Howey Test
The SEC often applies the Howey Test to establish if an asset is a security or not. An asset qualifies as a security if it has the following characteristics:
- An Investment of Money: People put money into the asset to acquire it.
- In a Common Enterprise: The return from the investment depends on the success of the business or project.
- With an Expectation of Profits: The investors expect some return on their investment.
- Primarily Through the Efforts of Others: The profits depend on efforts by project developers or other third parties.
The SEC has argued that many cryptos meet these criteria, especially tokens sold in initial coin offerings (ICOs) or through centralized platforms.
Arguments by Trump Against the SEC
Trump is opposed to the SEC’s handling of cryptocurrencies, especially its aggressive application of the Howey Test and orientation toward enforcement rather than clarity. In his view, the SEC’s actions stifle innovation and drive crypto projects offshore, weakening the U.S. position in the global blockchain industry.
This stands in sharp contrast to Trump’s assertion that the nature of cryptocurrencies best fits in a commodity approach by the CFTC. By handling it like a commodity instead of a security instrument, the U.S. would be better able to regulate yet innovate at a more appropriate level.
This raises the larger issue of adapting extant legal regimes to new technologies. FIT21 is an attempt to craft a clear, dual-agency system, but Trump’s stated preference for the CFTC would push the scale toward a more commodity-based model.
For the crypto industry, this would be a good omen.
- Clarity in Rules: A defined regulatory regime under the CFTC would clear confusion surrounding what constitutes a cryptocurrency.
- Boosting Innovation: If cryptocurrencies are classified as commodities, the legal risks for developers and startups innovating with blockchain technology will decrease.
- Expansion in the Market: A friendlier regulatory environment will attract more investments and talent in the US crypto market.
Donald Trump’s potential plan to elevate the CFTC as the main crypto regulator shows a vision for less stringent, innovation-friendly cryptocurrency regulation. His criticism of the SEC, combined with Gary Gensler’s resignation, marks a critical moment for the crypto industry.
If Trump’s vision is realized, treating cryptocurrencies as commodities rather than securities could redefine the landscape, foster growth, and further solidify the U.S. as a leader in blockchain innovation. However, balancing these competing interests will require navigating complex political, legal, and economic challenges over the coming years.
