Safety? Merchandise? What happens if crypto is both?

by Arthur · April 12, 2023

Christy Goldsmith Romero, Commissioner of the Commodity Futures Trading Commission Valerie Plesch—Getty Images

Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on politics and regulation.

No topic animates the crypto regulatory crowd more than whether cryptocurrencies are securities or commodities, an esoteric question that should be relegated to law school electives but could instead determine America’s future for the industry.

Without revisiting the specifics of the Howey test for the umpteenth time, the relevant result here is that if cryptocurrencies are securities, they fall under the jurisdiction of the Securities and Exchange Commission, an agency that has shown marked hostility to the sector. If cryptocurrencies are commodities, the more open-minded Commodities Futures Trading Commission is in charge.

That government agencies are constantly fighting for jurisdictional control—and the funding and bragging rights that come with it—is no secret. In recent months, as debates over crypto regulation have escalated following the collapse of FTX, the CFTC and SEC have appeared to be waging a proxy war over the industry, invoking oversight by declaring their stance on various cryptocurrencies’ classifications through public testimony and lawsuits.

When asked directly, however, executives from both agencies would dismiss any notion of a turf war. Christy Goldsmith Romero, a commissioner of the CFTC, sponsor of its Technology Advisory Committee, and former SEC attorney did just that last week at Chainalysis’s Links conference at a Midtown Manhattan Marriott, where we captured a floor above the collective of law enforcement agencies, crypto sleuths, and at least one K-9 police dog.

Every time the CFTC declares a digital asset to be a commodity in a lawsuit, as it recently did with its complaint against Binance in March, Crypto Twitter erupts in glee. Goldsmith Romero threw cold water on the idea that this should be perceived as something small against the SEC.

“It’s not an either/or — almost everything is a commodity unless it’s an onion or a movie ticket,” she told me. “Something can be a commodity and a security at the same time.”

In other words, for the CFTC to have jurisdiction over a company like Binance, it must classify the assets in question as commodities. It does not automatically rule out that these assets are also securities, which would take them out of CFTC jurisdiction. As Goldsmith Romero explained, whether an asset like Ether is also a value is the SEC’s call, not the CFTC’s.

“This or that is not the actual discussion,” she said. “It’s a question of whether it’s just this, or this and that.” (A sincere apology for turning this newsletter into an LSAT logic question.)

While Goldsmith Romero’s argument does not dismiss the reality of the SEC and CFTC’s jurisdictional tussle—a fundamental reality created by the lack of congressional action—she cautioned against reading into policymaking from enforcement actions.

“It doesn’t reflect my reality to call it a turf war,” she said.

More pressing on her agenda will be the accountability of decentralized autonomous organizations, a hot-button topic that came into the spotlight with the CFTC’s decision last year to target members of one such group, the Ooki DAO. Expect that to be a major topic of her technology advisory committee this year. Still, Goldsmith warned Romero that the immaturity of the DeFi sector – and crypto more broadly – will mean future cases will be based on facts and circumstances, rather than a bright-line rule about what constitutes decentralization.

Leo Schwartz
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@leomschwartz