SEC v. Ripple: CFTC Commissioner explains “Commodity or Security?” fallacy

Rick Steves

Although the CFTC does not regulate pure commodities, its authority includes anti-manipulation and anti-fraud enforcement over said commodities, including digital assets.

CFTC Commissioner Dawn Stump, who has said is following the SEC v. Ripple lawsuit for its potential to provide regulatory clarity, has come forward to end the fallacy of the question “Is it a Commodity or a Security?”

“The CFTC’s regulatory oversight authority, as well as the application of our enforcement authority, must be well understood by the public. Only then can proper regulatory compliance be demanded”, said the CFTC Commissioner in what could be perceived as a wink at the SEC’s highly criticized regulation-by-enforcement practice.

“The recent growth in popularity of crypto products and other digital assets has drawn much attention to the question of how this new financial asset class is regulated in the United States.

“In response, there has often been a grossly inaccurate oversimplification offered which suggests these are either securities regulated by the Securities and Exchange Commission, or commodities regulated by the Commodity Futures Trading Commission. The prevalence of this misunderstanding about U.S. regulatory delineations has grown to a point that I believe requires correction”, the Commissioner continued.

“The CFTC does not regulate commodities (regardless of whether or not they are securities); rather, it regulates derivatives—and this is true for digital assets just as for any other asset class.”

Commissioner Stump has thus presented an analysis of what the current system is all about and where digital assets fit. This should be understood before considering whether to redesign the regulatory structure in the crypto context, she stated.

The 10 concise points laid out by the CFTC Commissioner include the definition of “commodity” and the CFTC’s authority which does not include the oversight of cash commodities (instead of futures contracts and other derivatives).

In other words, the CFTC does not regulate commodities but their derivatives. “Therefore, even if a digital asset is a commodity, it is not regulated by the CFTC”. But the trading of futures contracts on Bitcoin or Ether fall under its scope.

A point that is well established is that the CFTC does not regulate securities, the SEC does. However, the trading of derivatives on a security could fall under the scope of either the SEC or CFTC or both.

SEC v. Ripple: Are you up to date?

Although the CFTC does not regulate pure commodities, its authority includes anti-manipulation and anti-fraud enforcement over said commodities, including digital assets. This is because “well-functioning futures contracts (and other derivatives products) rely upon a sound underlying cash market and may reference cash market indexes in their pricing”.

This is why the regulator has used such enforcement authority to deter manipulation and fraud involving cash digital assets, even though the CFTC does not regulate them, Commissioner Stump explained.

According to the statement, digital assets like BTC and ETH – which have been controversially declared as non-securities by SEC officials – aren’t themselves regulated by the CFTC. Only related fraud and manipulation could be subject to enforcement actions by the CFTC, as well as the trading of derivatives.

As to Ripple’s digital asset XRP – which finds itself in legal turmoil with the Securities and Exchange Commission – it remains to be seen whether it will ultimately be considered a security by the court. If not, XRP is likely to join the list that includes BTC and ETH.

A recently proposed bill in Congress is likely to further push XRP toward the non-security group of digital assets, according to attorney Thien-Vu Hogan.

SEC Chair Gary Gensler seems to disagree. “Certain rules related to crypto assets are well-settled. The test to determine whether a crypto asset is a security is clear”, he said in a letter.

A number of academics have said otherwise, including in Rutgers Law School and the American Enterprise Institute, suggesting a different approach to digital assets.

The SEC v. Ripple lawsuit is potentially the most critical threat to the validity of the Howie Test. The financial watchdog has recently stated so when it warned the Court that a Ripple win on the Fair Notice Defense would deem it null.

That is also why many law experts close to the legal battle over the nature of XRP have said that a Ripple win on summary judgment on that defense “could save the industry from the SEC”.



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