Clarified cryptocurrency regulation may come from expanded CFTC power under Trump Administration.
With President Donald J. Trump’s electoral victory, cryptocurrency may enter a new era of regulation through increased oversight authority by the Commodity Futures Trading Commission (CFTC). This shift would align with the new Administration’s goal of reducing the U.S. Securities and Exchange Commission (SEC) oversight power. Such a shift would be beneficial to the cryptocurrency industry and help resolve the jurisdictional conflict brewing between the SEC and CFTC.
Currently, the SEC and the CFTC have competing definitions of cryptocurrencies. The SEC classifies digital assets as securities under the Howey Test, which provides criteria for assets to qualify as “investment contracts” and therefore be subjectable to SEC securities laws. The CFTC, however, defines cryptocurrencies as commodities, such as gold or oil.
Both agencies assert jurisdiction over digital assets, but often, cryptocurrencies have characteristics of both securities and commodities. For example, some coins, primarily used as investment tools, align more closely with securities. Others, such as Bitcoin, are individual tokens within a blockchain – a database that stores data in “blocks” that are linked. Such structures lean more closely to commodities.
The SEC has exercised its jurisdiction over cryptocurrencies through enforcement actions against unregistered crypto-asset platforms and brokers, assuming most cryptocurrencies are investment contracts and fall under SEC authority. On the other hand, the CFTC has taken action when virtual currencies are used in derivative contracts, pursuing fraudulent activities and market manipulation.
In May 2024, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT 21), which clarifies jurisdiction between the SEC and CFTC by categorizing cryptocurrencies into distinct categories, each regulated by one of the two agencies. FIT 21 would expand the CFTC’s authority over spot markets, where financial assets are traded for cash, while reducing the SEC’s authority to assets without a decentralized blockchain.
FIT 21 would divide cryptocurrencies into digital commodities, restricted digital assets, and permitted payment stablecoins. While FIT 21 offers more clarity on the first two categories, it provides fewer details on stablecoins, but the U.S. Senate is moving forward with legislation to regulate stablecoin issuers and protect consumers.
FIT 21 would assign commodities to the CFTC after an initial approval by the SEC. Digital assets that fail to meet the requirements for commodity decentralization remain under the SEC’s purview and face stringent reporting and disclosure requirements. FIT 21 would also limit the SEC’s reach by narrowing the definition of “federal security” to exclude investment contract assets that would fall under the CFTC’s purview.
Although FIT 21 would be a positive step toward regulatory clarity for crypto, it lacks clarity for cryptocurrencies with hybrid structures that could qualify as either securities or commodities. These assets, which make up the majority of cryptocurrencies, would benefit from clearer guidelines within the proposed framework.
In the U.S. Senate, Senator Bill Hagerty (R-Tenn.) introduced a draft of the Clarity for Payment Stablecoins Act, while Senators Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.) introduced the Payment Stablecoin Act, both of which aim to regulate stablecoins. Under both bills, stablecoins, which are digital currencies pegged to a traditional currency such as the U.S. dollar, would be overseen by the Federal Reserve and state regulators.
The main difference between the two Senate stablecoin bills is that the Lummis-Gillibrand PSA would create a dual regulatory environment between state-level governing bodies and the Federal Reserve. Conversely, the Clarity for Payment Stablecoins Act allows state-level regulators to handle the process without input of the Federal Reserve.
The chief executive of Coinbase, a leading cryptocurrency trading platform, has predicted that crypto legislation will work through Congress “fairly quickly” in the Trump Administration due to vocal support for crypto development by Republicans during the race. But the exact level of priority of crypto regulation amidst other policy issues remains unclear.
Another option is for the Trump Administration to encourage a joint statement from the SEC and CFTC to clarify each agency’s authority while Congress focuses on other policy priorities. Such a path, however, would be more easily reversible by a less crypto-friendly Administration in the future.
The United States needs a clearer regulatory framework for cryptocurrencies with consumer protection and economic policy as top priorities. The Trump Administration should pursue the passage of FIT 21 to resolve the current jurisdictional conflict between the SEC and CFTC. In addition, Congress should look to pass one of the stablecoin bills to establish a cohesive, nonpartisan regulation of dollar-backed stablecoins. As digital assets grow in importance within individual’s financial portfolios, a clear regulatory framework will protect both individuals and institutions, ensuring the U.S. remains competitive in maintaining its currency dominance.
