SEC and CFTC at loggerheads over crypto jurisdictional rights

Whether a cryptocurrency is a ‘security’ or a ‘commodity’ is under debate amongst different regulatory bodies. The US Securities and Exchange Commission (SEC) thinks that all Proof-of-Stake tokens and digital assets should be treated as securities. The Commodity Futures Trading Commission (CFTC) on the other hand thinks Ethereum, which already trades as a futures contract on its exchange, should be classed as a ‘commodity’. 

CFTC:  Ethereum should fall under the commodities category

There has been much regulatory confusion around Ethereum since the network transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS). The crossover happened in September 2022 during the Merge event. Notably, Proof-of-Stake defines the process used to run blockchains, such that coin holders can earn financial rewards when they allow some of their tokens to be used for transaction ordering.

The confrontation comes after the apparent loggerheads between the SEC chair Gary Gensler’s view and the views of CFTC chairman Rostin Behnam. In a recent statement, Behnam said he thought Ether was a commodity. Additionally, the derivatives market regulator said that because Ether futures have been trading on the CFTC exchange, they must fall under their jurisdiction.

SEC: PoS tokens like Ethereum should be regulated as securities

According to Gensler, PoS tokens, which account for most major cryptos, should be regulated as securities. Based on his argument, developers of protocols that pillar such tokens often promote their projects on social media avenues, with investors flocking to them, hoping to earn returns. In an open meeting with the SEC on March 15, the chair said:

I would suggest that each of these token operators, obviously consulting with the appropriate talent, seek to come into compliance.

Cryptocurrency companies want to avoid the ‘security’ tag as it constitutes investor-protection requirements, which according to many, are incompatible with the asset class. Nevertheless, they are coming under increasing regulatory scrutiny.

This is not the first time the SEC chair has expressed concerns over PoS tokens. He did the same during the 2022 Ethereum “Merge.” In that instant, Gensler was careful to say he was not speaking about any digital coin in particular.

A month ago, the SEC penalized Kraken with a $30 million fine after the giant US-based crypto exchange offered staking products that let users earn passive income. Subsequently, in a lawsuit against digital asset exchange KuCoin filed last week, New York Attorney General Letitia James branded Ether a security. Notably, this was one of the isolated cases that explicitly put the Ether (ETH) token in that legal status.

Nevertheless, Gensler refused to comment about any token in particular, adding that he “loves” the CFTC.