Regulation by Enforcement Is Unsustainable, CFTC Chair Tells Congress

On the heels of the SEC suing both Binance and Coinbase, the House Agriculture Committee gathered Tuesday morning for a dual panel hearing to discuss crypto spot market regulation.

Lawmakers first posed questions to Commodity Futures Trading Commission Chair Rostin Behnam, before turning to a five-witness panel consisting of industry and former CFTC executives.

Behnam in his remarks focused on crypto token classification, the current pattern of regulation by enforcement and the need for regulatory clarity. The SEC made a point of deeming more than 10 tokens securities between its Binance and Coinbase suits this week.

“There are some who argue ‘the SEC’s got this,’” Dusty Johnson, R-S.D., said during his allotted time to question Behnam.

But should the SEC have total control over digital assets, Johnson asked?

“This is not a zero-sum game,” Behnam said. “For anything that the CFTC might get in legislative or legal authority, I’m not taking it from someone else. There is a regulatory vacuum, there is a gap in regulation over digital commodity assets.”

SEC securities authority

The SEC should have authority over assets classified as securities, according to Behnam, who added that “the fact of the matter is the largest token, bitcoin, is a commodity, and that was determined by a US court, and that, under US law, is unregulated.”

Most exchanges list very few crypto assets that have already been officially classified as commodities, Behnam said. The CFTC chair made the point that, as such, there’s a pressing need to give the regulator additional authority over the crypto commodity sector.

Several lawmakers aired concerns about the perceived pattern of regulation by enforcement in the US.

“Regulation by enforcement is not an appropriate way to govern a market, adequately protect customers or promote innovation,” Committee Chair Glenn Thompson, R-Penn., said during his prepared remarks.

Rep. Jim Govern, D-Mass., asked Behnam what could happen if this pattern continues.

“The evidence is in our enforcement record, and we even point to the SEC’s enforcement record as well,” Behnam said. “We brought 82 cases over about 8 years, and [these] 82 cases [came from] an agency that doesn’t have regulatory authority.”

The issue is not that the CFTC and SEC should avoid charging entities in violation of existing law, according to the CFTC chair. But it’s rather, in Behnam’s estimation, about a need for more congressional authority to address crypto risks and establish clear policies.

“My fear is that this… is the tip of the iceberg,” Behnam said. “As this market ebbs and flows in size, and it has largely stabilized in the last six months, if it starts to peak and move into a direction of growing, you could potentially have financial stability concerns.”

Tuesday’s hearing started just hours after the SEC unveiled charges against crypto exchange Coinbase for alleged securities laws violations. The complaint was filed one day after the SEC levied similar charges against Binance, the world’s largest exchange.

Coinbase Chief Legal Officer Paul Grewal is set to join Dan Gallagher, Robinhood’s chief legal compliance and corporate affairs officer, on the second panel of Tuesday’s hearing.

Second panel witnesses also include former CFTC Chair Christopher Giancarlo, former CFTC Commissioner and former SEC General Counsel Dan Berkovitz, and Walt Lukken, former CFTC acting chair.

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