CFTC reaffirms oversight of virtual currency spot markets and futures

Excerpts from written Testimony of Chairman Christopher Giancarlo before the Senate Banking Committee

We are entering a new digital era in world financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination. With the proper balance of sound policy, regulatory oversight and private sector innovation, new technologies will allow American markets to evolve in responsible ways and continue to grow our economy and increase prosperity. This hearing is an important part of finding that balance.

In contrast to the spot markets, the CFTC does have both regulatory and enforcement jurisdiction under the Commodities Exchange Act (CEA) over derivatives on virtual currencies traded in the United States. This means that for derivatives on virtual currencies traded in US markets, the CFTC conducts comprehensive regulatory oversight, including imposing registration requirements and compliance with a full range of requirements for trade practice and market surveillance, reporting and monitoring and standards for conduct, capital requirements and platform and system safeguards.

The CFTC has been straightforward in asserting its area of statutory jurisdiction concerning virtual currencies derivatives. As early as 2014, former CFTC Chairman Timothy Massad discussed virtual currencies and potential CFTC oversight under the CEA.  And as noted above, in 2015, the CFTC found virtual currencies to be a commodity. In that year, the agency took enforcement action to prohibit wash trading and prearranged trades on a virtual currency derivatives platform. In 2016, the CFTC took action against a bitcoin futures exchange operating in the US that failed to register with the agency. Last year, the CFTC issued proposed guidance on what is a derivative market and what is a spot market in the virtual currency context. The agency also issued warnings about valuations and volatility in spot virtual currency markets and launched an unprecedented consumer education effort.

The CFTC has sufficient authority under the CEA to protect investors in virtual currency derivatives over which the CFTC has regulatory jurisdiction under the CEA. As noted above, the CFTC does NOT have regulatory jurisdiction over markets or platforms conducting cash or “spot” transactions in virtual currencies or over participants on those platforms. For such virtual currency spot markets, CFTC only has enforcement jurisdiction to investigate and, as appropriate, conduct civil enforcement action against fraud and manipulation. Any extension of the CFTC’s regulatory authority to virtual currency spot markets would require statutory amendment of the CEA. The CFTC is an experienced regulator of derivatives markets that mostly serve professional and eligible contract participants. Such extension of regulatory authority would be a dramatic expansion of the CFTC’s regulatory mission, which currently does not give the CFTC regulatory authority (distinct from enforcement authority) over cash commodity markets.

Read the full testimony

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