CFTC and SEC: the war on crypto considered security tokens

The CFTC is the Commodity Futures Trading Commission, which is the U.S. government agency that oversees the commodity and defi futures markets

The President of the Commodity Futures Trading Commission (CFTC), Rostin Behnam, stated on Thursday that he believes that most cryptocurrencies should not be classified as security tokens.

However, he also noted that Bitcoin and Ethereum should be considered commodities due to a court ruling, but this classification does not yet extend to the majority of altcoins.

The CFTC oversees the commodity and defi futures markets in the U.S., and in 2017, they authorized the stock market debut of the first futures on Bitcoin, which were later used to issue ETFs approved by the SEC.

The Securities and Exchange Commission (SEC) is responsible for securities and exchanges, and there has been an ongoing dispute between the two agencies over the regulation of the crypto market.

Given that Bitcoin and Ethereum are classified as commodities, the CFTC should handle their regulation. However, the SEC disagrees and rejected ETFs on BTC spot after approving them for Bitcoin futures.

After a court ruled that the rejection was illegitimate, the SEC finally caved and approved ETFs on Bitcoin spot in January.

For Ethereum, the SEC approved ETFs in May, likely due to the court ruling that classifies Ethereum as a commodity.

It’s important to note that the reasoning about whether cryptocurrencies are commodities or securities cannot be generalized and must be applied individually to each cryptocurrency.

Therefore, it cannot be assumed that all cryptos similar to Bitcoin and Ethereum are commodities just because those two are. Each case needs to be analyzed separately.

For instance, in the case of XRP (the cryptocurrency of Ripple), a court ruled that its trades on secondary markets (the exchanges) cannot be considered investment contracts, so it is, in fact, to be considered a commodity in that case.

But there is still an ongoing lawsuit by the SEC against Ripple, which is accused of initially issuing XRP on the primary market as a security token.

In the financial realm, a security is a title issued by an issuer who is legally required to register it with the SEC before issuing it.

The key point is that it is essentially a financial contract in which the issuer promises gains to the subscriber, but only in relation to activities carried out by the issuer itself, and not by the purchaser.

So if someone sells investment contracts to investors who buy them with the sole purpose of making a profit thanks to the work of the seller, they are issuing a security, and they are required to be registered with the competent authority. If they are not registered, the security is considered unregistered, and therefore its sale is considered illegal.

This reasoning applies not only to traditional financial products, but to any type of financial asset, including cryptocurrencies.

Therefore, if someone creates a cryptocurrency, or a token, which is sold in exchange for the promise of generating a profit for those who buy it, that cryptocurrency should be considered a security token.

The security token, being security in all respects, must be registered with the SEC in order to be lawfully sold on the U.S. financial markets.

Practically no cryptocurrency is registered with the SEC, except for very rare exceptions.

Exceptions are instead made for those cryptocurrencies that are not securities because they do not promise any profit.

BTC for example have never been sold by those who created or mined them as investment contracts, but only as assets whose market value is volatile. In other words, those who buy them do not receive a promise of profit.

The same thing applies to ETH, even if in this case there is staking that promises gains. In theory, however, staking exists thanks to the activities carried out by those who own the tokens and deposit them on their own node. The discussion changes only for the so-called staking-as-a-service that many crypto exchanges, for example, do, which could fall under investment contracts.

While on one hand the SEC for a long time has tried in vain to prove that Ethereum should be considered an unregistered security, the CFTC on the other hand has always maintained that both Bitcoin and Ethereum should be considered commodities.

From this point of view, yesterday’s words of President Behnam are not surprising: he merely reiterated that there is now even a court ruling that confirms it.

Instead, the CTFC had never really pronounced itself on altcoins.

The SEC continues to consider almost all altcoins as securities, while the CFTC argues that most cryptos should not be considered as such.

Yesterday, during a hearing at the Senate Appropriations Committee, Behnam explicitly stated that he believes 70%-80% of all cryptocurrencies are non-security.

Moreover, he said it explicitly, whereas SEC Chairman Gary Gensler has often made unclear statements about it.

This on one hand intensifies the confrontation between SEC and CFTC, and the struggle to gain oversight of the crypto market, and on the other hand suggests that there is a 20% or 30% of tokens that should almost certainly be considered unregistered securities.