On Wednesday afternoon, someone at the Commodities Futures Trading Commission sat down to issue a momentous tweet:
And lo, there was much rejoicing. The top reply to the CFTC tweet, from the account @MrXBTC, claimed simply that “this should be super bullish” for cryptocurrency markets. The idea that legal classification of cryptocurrency as a commodity is a Good Thing is widespread in crypto circles, in part because it means bitcoin and similar assets won’t be regulated by the Securities and Exchange Commission.
But reaction to the decision, which came in a fraud case against the creators of something called My Big Coin, showed that there’s still plenty of confusion about its real impacts. In fact, some crypto-fans seem to assume the exact opposite of its real consequences.
We’d like to keep as many of our readers out of prison as possible. So here’s the real skinny.
What it DOESN’T Mean: That the SEC is out of the picture.
This decision found that cryptocurrency, as a particular kind of blockchain-backed asset, is a commodity. But cryptocurrency isn’t the only kind of blockchain token. Some are explicitly and self-declared “security tokens,” while others—I’m looking at you, Every ICO Ever—are securities in the eyes of the law because of the way they’re promoted, sold, or structured. The SEC will still hold sway there, and may still pursue action against anyone who issues a security without following its registration rules.
It’s also unlikely that conflict over jurisdiction between the two agencies will leave any daylight between them. According to lawyers who pay close attention to the politics within and between the agencies, their days of squabbling are largely behind them, and both bodies are primarily concerned with making sure somebody is riding herd.
Perhaps the biggest question on the line here is regarding XRP. The token was issued without SEC oversight, and Ripple, the company that uses the token as infrastructure and holds millions of dollars worth of it, has been arguing very publicly that the company itself didn’t actually create it. The community of Ripple supporters, meanwhile, has become increasingly insistent that XRP is a cryptocurrency, and not a digital security, with the implication that this will keep the SEC at bay. But the truth is that the My Big Coin decision has very few substantive implications for how that question will be settled. The fact that cryptocurrencies are commodities doesn’t mean that XRP is a cryptocurrency.
What this DOES Mean: The CFTC can pursue nearly any cryptocurrency-related fraud.
One apparent misconception in reactions to the decision is that classifying cryptocurrency as a commodity somehow means there are no rules. That’s true in one extremely limited sense—the CFTC doesn’t regulate the cash trade in commodities. As its name implies, its formal jurisdiction is over futures, options, and certain other financial instruments linked to commodities. For example, the CFTC can’t control the buying and selling of physical gold, only gold-related financial instruments.
But its authority over futures also gives the CFTC authority over cash sales of commodities if there is fraud involved.
The legal logic goes like this: Bitcoin is a commodity, in one straightforward legal sense, because a futures market for it exists. Because fraud or manipulation impacts the futures market for cryptocurrency, the CFTC can punish that fraud. And that likely doesn’t just apply to bitcoin-specific fraud, but to any cryptocurrency. One rough parallel is to the oil market. There are many different grades and kinds of oil, and fraud or deception in the trade of one type impacts the market for all of them—therefore the CFTC can claim jurisdiction.
What it DOES Mean: That the CFTC has serious enforcement power.
One reason that bitcoiners are happy to be regulated by the CFTC instead of the SEC is that, for many years, the CFTC took a relatively light touch. But that’s not because they didn’t care about fraud—it’s because the law defining their powers set a very high bar to prove wrongdoing.
That changed with the 2010 Dodd-Frank Act, which made the CFTC’s powers closer to the SEC’s, including expanding its authority over spot market manipulation. The precise extent of that authority is still being worked out in the courts, though, and not just with regards to cryptocurrency.
What it DOESN’T Mean: That we know exactly what the rules are.
The SEC’s standards for disclosure and compliance are clearly laid out, and you have to meet them before you issue a security. But CFTC enforcement has a trickier structure—the agency decides what constitutes fraud more or less on a case-by-case basis, and (obviously) only after an alleged crime has taken place.
This is, on the whole, not as great for cryptocurrency issuers as it might seem at first glance, because there’s so much inherent uncertainty. To put it in the grimmest possible terms, a lot of people or entities could be under scrutiny for fraud by the CFTC and not even know it—hence Ripple’s manifest anxiety surrounding XRP.
“When you’re on the SEC side, you have a well-defined system for registration and disclosure,” explained Todd Kornfeld, a member of the Financial Services Department of Pepper Hamilton LLP. “On the CFTC side of the wall, it’s true there’s no real regulatory framework that requires you to register the cash or spot sale of cryptocurrencies. But the CFTC has significant anti-fraud power, and the market has limited knowledge of what the CFTC thinks is sufficient sale disclosure or what is not fraudulent, market manipulative, or deceptive. So there’s arguably more uncertainty in some respects under the CFTC’s jurisdiction.”
What it DOESN’T Mean: That any of this is settled.
The latest decision about CFTC jurisdiction came during a preliminary hearings, and so did a similar ruling back in March. That holds a bit less weight within the legal system than some other kinds of rulings. So while this is beginning to look like a settled precedent, there is still the outside chance that a court in the future will argue something different.
What it DOES Mean: The Net is Closing.
There’s still a widespread sense in crypto that regulators are the enemy. The cynical view is that this is because cryptocurrency’s main applications are for things—such as issuing unregistered securities!—that would be patently illegal if they were done using traditional methods. The My Big Coin decision doesn’t stay the hands of regulators in the slightest, or codify that cryptocurrency and blockchain can remain the Wild West.
Instead, it affirms what cautious people have been assuming for years: The authorities are watching, and if you commit a crime, it doesn’t matter if you do it on the blockchain.