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It’s not a question of “if” a federal agency will begin regulating cryptocurrency. Instead, the questions are “when” and “how” will a federal agency start regulating the crypto space. But before the federal government can reach those questions, the threshold question is this: Which federal agency will regulate cryptocurrency?

The two primary contenders to regulate cryptocurrency are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC is the agency charged with overseeing securities trading in equity markets. Securities and Exchange Commission, What We Do, SEC.gov.

The CFTC regulates the trading of commodity (precious metals, agriculture, oil, etc.) futures. Commodity Futures Trading Commission, Commodity Exchange Act & Regulations, CFTC.gov.

So the question of whether the SEC or the CFTC will regulate cryptocurrency depends on whether cryptocurrencies are considered a security or a commodity.

In late June, the SEC rejected Grayscale Investments’ application to convert its current Grayscale Bitcoin Trust (tradeable on the over-the-counter market) to an exchange-traded fund (ETF). Michael Bellusci, SEC Rejects Grayscale’s Spot Bitcoin ETF Application, CoinDesk.Com. An ETF is a basket of securities that trades on a stock exchange. James Chen, Exchange-Traded Fund (ETF) Guide, Investopedia.com.

That might seem to mean that, by rejecting Grayscale’s application to create a Bitcoin ETF, the SEC is implicitly ruling that Bitcoin is not a security, putting Bitcoin outside the SEC’s purview.

But a closer look at the SEC’s decision reveals that it denied Grayscale’s application because of insufficient means to detect and deter fraud and manipulation. See Self-Regulatory Organizations; New York Stock Exchange LLC, NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Shares of Grayscale Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), available at: https://www.sec.gov/rules/sro/nysearca/2022/34-95180.pdf.  

Thus, the question remains open whether the SEC would approve a cryptocurrency ETF with adequate investor protection. Grayscale, represented by former U.S. Solicitor General Donald Verrilli, filed a petition in the D.C. District Court challenging the SEC’s decision. Ryan Browne, Grayscale sues SEC after rejection of bid to turn the largest bitcoin fund into an ETF, CNBC.com.

The CFTC currently regulates Bitcoin futures contracts—just as it does with other commodities futures contracts. Commodity Futures Trading Commission, What is a Bitcoin Futures ETF?, CFTC.gov. But does that position make sense for other cryptocurrencies? After all, some stablecoins are pegged to different assets. For example, the Tether has one stablecoin pegged to the dollar (USDT) and another stablecoin pegged to gold (XAUt). The dollar is considered a security; gold is a commodity. Tyler Bailey, The dollar is ‘the greatest security ever,’ says chart watcher, CNBC.com; Adam Hayes, Why Gold Matters: Everything You Need To Know, Investopedia.com. So will the CFTC regulate one form of cryptocurrencies (stablecoins, such as Tether) while the SEC regulates another (such as Bitcoin)? That seems an impractical solution to those in the cryptocurrency space trying to navigate regulatory waters. 

The federal government is unquestionably behind in developing and applying regulations to cryptocurrencies. Assuming the federal government has a basis for regulating cryptocurrencies, perhaps the best thing the government can do is choose or create one agency to regulate the industry and apply uniform regulations. Having crypto mining companies and other businesses juggle between the SEC and CFTC will only serve to create confusion and stifle innovation.