SEC and CFTC Could Regulate Crypto Through Rulemaking – Here’s How

• The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have yet to issue any crypto-specific rules, despite bringing more than 100 enforcement actions against crypto-asset market participants.
• If the agencies did decide to regulate crypto through rulemaking, they could use their existing authorities to reduce information asymmetries between issuers of securities and the investing public.
• Calls from policymakers to regulate through rulemaking rather than enforcement offer a useful way forward for the SEC and CFTC to take when it comes to regulating crypto.

Regulators are in no hurry to write rules for crypto, but the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have brought more than 100 enforcement actions against crypto-asset market participants. Despite this, neither agency has issued a single crypto-specific rule, and it is unlikely that they will change course any time soon.

However, if the agencies did decide to regulate crypto through rulemaking, they could use their existing authorities to reduce the informational disadvantage of outside investors. Federal securities laws are primarily designed to ensure that firms that raise capital from investors by selling a security, provide sufficient information about the investment to the public. This includes requiring firms to disclose their activities, their financials, and their risks.

In addition, the SEC has the authority to regulate the activities of broker-dealers and investment advisers, who can provide valuable services to investors in the crypto space. The CFTC, meanwhile, is responsible for regulating derivatives and commodities, including those based on crypto assets. The CFTC also has jurisdiction over spot markets for commodities, such as futures contracts.

Calls from policymakers to regulate through rulemaking rather than enforcement offer a useful way forward for the SEC and CFTC to take when it comes to regulating crypto. Rulemaking allows regulators to take a more proactive approach to establishing rules and regulations in the crypto space, rather than relying on enforcement actions to address misconduct. This would provide more guidance to the industry, helping to reduce risk and ensure the integrity of the crypto markets.

It is important to note, however, that both the SEC and CFTC would need to take a holistic approach when it comes to crypto regulation. This means that any rules and regulations issued must take into account both the nature of the crypto assets and the markets in which they are traded. Additionally, regulators must consider the impact of crypto-related activities on other financial markets.

The SEC and CFTC are unlikely to issue new rules covering crypto this year. But, if they did, calls from policymakers to regulate through rulemaking rather than enforcement offer a useful way forward. This would help to reduce information asymmetries between issuers of securities and the investing public, while also providing greater guidance to the industry and helping to ensure the integrity of the crypto markets.