Casey Wagner

A crypto bull market, coupled with the still-uncertain regulatory environment is going to create the perfect storm for increased enforcement actions, US Commodity Futures Trading Commission Chairman Rostin Behnam said.&nbsp;



“We find ourselves with a growing market, growing capital [and] investments, growing market capitalization, and I think a renewed interest by a lot of the entrepreneurs,” Behnam said Monday during a discussion at the Milken Institute’s Global Conference in Los Angeles.&nbsp;



“From my standpoint, as a regulator, we&#8217;re going to probably see in the next six to 18 months or six to 24 months another cycle of enforcement actions.”&nbsp;



Without action from Congress and increased regulatory transparency, Behnam added, agencies are going to lean more heavily on lawsuits.&nbsp;



Read more: <a href="https://blockworks.co/news/bank-secrecy-act-doj-kucoin">Bank Secrecy Act vs crypto: A new DOJ lawsuit revives old tactic</a>



“If you actually count the number of [Congressional] working days between now and the election…it’s really not that much time,” Behnam said when asked about the odds of any of the crypto-related bills making it to the floor for a vote in the House and Senate.&nbsp;



“Getting legislation done these days is difficult,” he added, but noted that there is “momentum” and “desire” from lawmakers to close some of the regulatory gaps around crypto, particularly with regards to <a href="https://blockworks.co/tag/stablecoins">stablecoin</a> legislation.&nbsp;



Behnam’s comments come days after retail trading platform Robinhood announced it <a href="https://blockworks.co/news/robinhood-wells-notice-sec">received a Wells notice</a> from the US Securities and Exchange Commission. Securities regulators plan to proceed with an enforcement action relating to cryptocurrencies traded on the exchange, Robinhood said in a <a href="https://www.sec.gov/Archives/edgar/data/1783879/000178387924000138/hood-20240504.htm">filing</a> Saturday.&nbsp;



“After years of good faith attempts to work with the SEC for regulatory clarity including our well-known attempt to ‘come in and register,’ we are disappointed that the agency has decided to issue a Wells Notice related to our US crypto business,” Dan Gallagher, Robinhood’s chief legal and compliance officer, said in a statement.&nbsp;



Last week, Consensys revealed it was also served a Wells notice from the SEC, in addition to a <a href="https://blockworks.co/news/empire-newsletter-consensys-legal-salvo-sec">number of subpoenas relating</a> to Ethereum. The SEC has not yet brought an enforcement action against Consensys, but the crypto firm is suing the exchange preemptively.&nbsp;



Behnam did not comment Monday on his agency’s relationship with the <a href="https://blockworks.co/tag/sec">SEC</a> with regards to crypto industry regulation, but Congressional leaders have been debating about how to address the so-called “turf war” between the agencies for over a year.



&#8220;When we have two agencies <a href="https://blockworks.co/news/cftc-ether-security-commodity-conflict">contradicting each other</a> about whether one of the most utilized stablecoins in the market is a security or a commodity, we end up with uncertainty,” Rep. French Hill, R-Ark., who chairs the House Subcommittee on Digital Assets, said during an April 2023 hearing.



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CFTC’s Behnam warns crypto industry that more enforcement actions are coming 

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 <a href="https://blockworks.co/tag/rostin-benham">Rostin Behnam</a>, before turning to a five-witness panel consisting of industry and former <a href="https://blockworks.co/tag/cftc">CFTC</a> executives. 



Behnam in his remarks focused on crypto token classification, the current pattern of regulation by enforcement and the need for regulatory clarity. The <a href="https://blockworks.co/tag/sec">SEC</a> made a point of deeming more than <a href="https://blockworks.co/news/sec-10-tokens-securities">10 tokens securities</a> between its Binance and Coinbase suits this week.&nbsp;



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



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



Read more: <a href="https://blockworks.co/news/gensler-dollar-is-digital-currency">Gensler Says US Dollar Is Only Digital Currency We Need</a>



“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.”&nbsp;



<h2 class="wp-block-heading">SEC securities authority</h2>



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.”&nbsp;



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.&nbsp;



“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.&nbsp;



“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.”&nbsp;



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.”&nbsp;



Tuesday’s hearing started just hours after the SEC<a href="https://blockworks.co/news/sec-sues-coinbase"> unveiled charges against crypto exchange Coinbase</a> for alleged securities laws violations. The complaint was filed one day after the SEC levied <a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges">similar charges against Binance</a>, the world’s largest exchange.&nbsp;



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.&nbsp;



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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Regulation by Enforcement Is Unsustainable, CFTC Chair Tells Congress

Shalini Nagarajan

The head of the CFTC has reaffirmed opinions on the securities status of major cryptocurrencies, including ether, that outright clash with SEC chief Gary Gensler’s interpretation of securities law.



At a Senate Agriculture Committee <a href="https://www.agriculture.senate.gov/hearings/oversight-of-the-commodity-futures-trading-commission-03-08-2023" target="_blank" rel="noreferrer noopener">hearing</a> Wednesday, CFTC Chairman Rostin Behnam made the case that both <a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ether</a> and stablecoins such as tether (<a href="https://blockworks.co/tag/usdt" target="_blank" rel="noreferrer noopener">USDT</a>) could be considered commodities.



Meanwhile, Gensler has claimed <a href="https://twitter.com/AlexanderGrieve/status/1629816811360337920" target="_blank" rel="noreferrer noopener">every crypto asset, besides bitcoin</a>, is likely a security. He&#8217;s even argued that Ethereum’s move to proof-of-stake, which allows holders to earn income passively through staking, could <a href="https://www.wsj.com/articles/ethers-new-staking-model-could-draw-sec-attention-11663266224" target="_blank" rel="noreferrer noopener">transform</a> it into a security (if it wasn’t already one).



Here’s what Behnam, the top commodities watchdog, had to say this week:



<h2 class="wp-block-heading">CFTC already greenlit ether futures</h2>



Behnam was asked what he thinks of Gensler’s suggestion that all digital assets except bitcoin are securities.



“I’ve made the argument that ether is a commodity,” he said. “It’s been listed on CFTC exchanges for quite some time. And for that reason, it creates a very direct jurisdictional hook for us to police, obviously, the derivatives market but also the underlying market as well.”



Fortune <a href="https://fortune.com/crypto/2022/11/30/inaction-is-paralysis-cftc-chair-rostin-behnam-calls-for-regulation-in-the-wake-of-ftxs-collapse/" target="_blank" rel="noreferrer noopener">reported</a> Behnam saying at an invite-only Princeton University event in November that bitcoin should be the only cryptocurrency viewed as a commodity. 



However, his latest statements suggest that view could have been softened.&nbsp;



“We would not have allowed the product – in this case the ether futures product – to be listed on a CFTC exchange if we did not feel strongly that it was a commodity asset because we have litigation risk, we have agency credibility risk if we do something like that without serious legal defense or defenses to support our argument that that asset is a commodity.”



In a December lawsuit against FTX, the CFTC <a href="https://twitter.com/NorthRockLP/status/1602743320995766272" target="_blank" rel="noreferrer noopener">referred</a> to bitcoin, ether and tether as commodities under US law. 



<h2 class="wp-block-heading">CFTC considers Tether a commodity</h2>



The hearing was called to discuss the aftermath of customer losses caused by FTX’s scandal, a result of calls for increased federal oversight of the crypto industry.



Behnam aside, speakers present at the hearing included Sen. Debbie Stabenow and Sen. John Boozman, who are both major backers of the <a href="https://www.agriculture.senate.gov/imo/media/doc/crypto_one-pager1.pdf" target="_blank" rel="noreferrer noopener">Digital Commodities Consumer Protection Act</a>, which seeks to regulate crypto trading. 



Behnam suggested that stablecoins are commodities in his view, although “colleagues might have a different opinion.



“Notwithstanding a regulatory framework around stablecoins, they’re going to be commodities in my view,” Behnman said.



He added: “Examining the circumstances around the Tether case, it was clear to our enforcement team and the Commission that the Tether stablecoin was a commodity, and we needed to move forward and swiftly to police that market and that company.”



For what it&#8217;s worth, Gensler has been indefinite about his take on stablecoins, once <a href="https://www.cnbc.com/video/2021/09/14/sec-chair-gary-gensler-says-stablecoins-may-well-be-securities.html" target="_blank" rel="noreferrer noopener">saying</a> in late 2021 that they “may well be securities.” 



This suggests they should come under the purview of the SEC (Paxos <a href="https://blockworks.co/news/binance-stablecoin-security-paxos-sec-wells" target="_blank" rel="noreferrer noopener">received</a> an SEC Wells notice last month over Binance USD). 



But then again, last October, Gensler <a href="https://www.reuters.com/technology/secs-gensler-says-cftc-authority-over-stablecoins-should-be-bolstered-2022-10-14/#:~:text=The%20vast%20majority%20of%20cryptocurrencies,handful%20are%20not%2C%20Gensler%20said." target="_blank" rel="noreferrer noopener">said</a> Congress should give the CFTC more power to oversee stablecoins.



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Ether and Stablecoins Could be Commodities: CFTC Chair 

Sebastian Sinclair

<div id="highlights-block_632d6c4e78003" class="highlights">
 <ul>
 <li>bZeroX’s protocol facilitated unlawful margined and leveraged retail commodity transactions on its platform between 2019 and 2021, the CFTC said Thursday</li>
 <li>Its DAO was operating without having first registered as a futures commission merchant, the regulator said</li>
 </ul>
 
</div>



The Commodity and Futures Trading Commission (CFTC) has filed and settled charges against a decentralized autonomous and its founders for facilitating margined and leveraged retail commodity transactions, which they say operated outside the law for years.



The bZeroX DAO deployed, marketed and made solicitations to customers under a protocol of the same name to undertake transactions considered unlawful because those transactions did not occur on a designated market contract, the CFTC said in a <a href="https://www.cftc.gov/PressRoom/PressReleases/8590-22" target="_blank" rel="noreferrer noopener">statement</a> Thursday.



According to the regulator, bZeroX, as well as founders Tom Bean and Kyle Kistner, have been ordered to pay $250,000 for their involvement.



The bZeroX platform was subjected to a <a href="https://bzx.network/blog/prelminary-post-mortem" target="_blank" rel="noreferrer noopener">phishing attack</a>, in November 2021, which extracted stablecoins and DeFi tokens and <a href="https://cms.blockworks.co/hacked-dao-faces-lawsuit-as-users-try-to-recoup-stolen-funds/" target="_blank" rel="noreferrer noopener">prompted a class action lawsuit</a>, though the CFTC is not considering that as part of its filing.



Acting as a pseudo trading marketplace from July 2019 to August 2021, the CFTC said the DAO’s protocol allowed users to take leveraged positions but that bZeroX was operating without having first registered as a futures commission merchant.&nbsp;



The DAO and its founder also failed to adopt know-your-customer procedures under the Bank Secrecy Act, the CFTC said. It&#8217;s believed to be the first such case the regulator has brought against a DAO.



Ooki DAO — a successor to bZeroX — also faces similar charges, the CFTC said. Ooki is said to be operating the same software as bZeroX. As such, the CFTC is seeking restitution, disgorgement, civil monetary penalties, trading and registration bans as well as injunctions against further violations.



While the case is unique based on the involvement of what is perceived as a decentralized organization, the regulator’s move aligns with sentiments laid out last week by CFTC Chair <a href="https://cms.blockworks.co/cftc-preparing-to-oversee-crypto-behnam-tells-senators/" target="_blank" rel="noreferrer noopener">Rostin Behnam</a>.



Behnam told the Senate Agriculture Committee his agency has already begun preparations to take the reins as the primary regulator for the crypto industry.&nbsp;



While the regulator attempts to position itself as the main authority over the new asset class, the SEC has been vying for similar oversight.



Earlier this month, SEC chair Gary Gensler said the CFTC can have authority over bitcoin and other unspecified “non-security tokens,” the securities regulator in turn, it would take charge over all other cryptos. 



The decision ultimately <a href="https://cms.blockworks.co/bitcoin-ether-to-be-regulated-as-commodities-by-cftc-per-new-senate-bill/" target="_blank" rel="noreferrer noopener">rests with</a> Congress, which will have to decide whether either regulator is deemed fit enough to police the industry or whether the creation of an entirely new oversight body is preferred.



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