SEC Chairman calls for a rulebook” for crypto to avoid gaps in oversight

The chairman of the U.S. Securities and Exchange Commission is seeking agreements with other financial regulators to prevent cryptocurrency operators from slipping through the cracks of the U.S.'s fragmented regulatory structure.

Gary Gensler told the Financial Times he is talking to his colleagues at the Commodity Futures Trading Commission about a formal agreement to ensure digital token trading has adequate safeguards and transparency.

His proposal comes as U.S. authorities' efforts to police cryptocurrencies become entangled in Washington politics, potentially reducing the SEC's influence over digital assets. Lawmakers on Capitol Hill are rushing to clarify what is legal and who is responsible for oversight.

The SEC and CFTC have historically focused on different aspects of the financial markets and rarely work together. The SEC primarily oversees securities and CFTC derivatives; Cryptocurrencies potentially straddle both markets.

At the same time, fines from enforcement measures are increasing. U.S. regulators have collected $3.35 billion in crypto enforcement actions since Bitcoin's emergence in 2008, according to government data compiled by British crypto analytics firm Elliptic, including $179.7 million in the first six months of this year. The SEC accounted for more than 70 percent of the penalties.

Gensler said he was working on a “memorandum of understanding” with the CFTC, which he led from 2009 to 2013. The SEC has jurisdiction over platforms that list tokens that are considered securities.

If a token representing a commodity is listed on a platform regulated by the SEC, the securities regulator would “forward that information to the CFTC,” Gensler said. The CFTC declined to comment.

"I'm talking about a set of rules on the exchange that protects all trading regardless of the pair - [be it] a security token versus security token, security token versus commodity token, commodity token versus commodity token" to protect investors from fraud, front-running, manipulation and provide transparency about order books, Gensler said.

The digital asset market has been hit by the impact of falling prices in recent months. Bitcoin price has fallen by more than two-thirds from a record high of nearly $70,000 in November. Exchanges have laid off staff and some lending platforms have blocked customers from withdrawing assets.

Gensler has been one of the most vocal regulators calling for greater oversight of cryptocurrencies and urged platforms to discuss whether they should register with his agency.

“By getting that market integrity envelope, having a set of rules on an exchange will really help the public,” he added. “As this industry charts a path forward, it will build better trust in these markets.”

But a bipartisan bill introduced by U.S. Senators Kirsten Gillibrand and Cynthia Lummis has proposed a crypto regulatory framework that would expand the CFTC's powers based on the assumption that most digital assets are more like commodities than securities.

The agency has traditionally focused on commodity derivatives such as futures and options rather than commodities themselves.

Rostin Behnam, who was appointed CFTC chairman in January, told the FT earlier this year that there could be “hundreds, if not thousands” of tokens that qualify as commodities, including Bitcoin and Ether.

Regulating cash crypto markets “could be a natural fit for us,” he said. The idea that “we’re not suitable I think is a bit wrong,” he added.

“Markets are markets, whether they are derivatives, stocks or fixed income,” Behnam said. "There is always a natural relationship between . . . derivatives in general and cash markets."

Both he and Gensler declined to comment on whether expanding the CFTC's jurisdiction over crypto would cause friction with the SEC or cause confusion.

Behnam said the legislation would "go very far to resolve this very delicate and difficult issue of which coins constitute commodities and which constitute securities."

The Gillibrand-Lummis bill did a "very good job" of distinguishing between securities and commodity tokens, Behnam said at a conference earlier this month.

At an event a few days later, Gensler did not comment on the bill, but warned against undermining existing protections in a "$100T capital market."

He added: "We don't want" exchanges or mutual funds "to accidentally say with the stroke of a pen, 'You know what? I want to be . . . Outside this regime, which I think has been of great benefit to investors and economic growth over the last 90 years.'