Are US Crypto Regulators Exploiting Territory Through Enforcement Actions?

As regulatory enforcement actions unfold between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), the latter subtly claimed Ethereum (ETH) and DAI, a stablecoin backed by other crypto tokens, as digital commodities. The way these two tokens are now being claimed is at the heart of what could be a legal battle between the two bodies over who gets to regulate crypto.

With the latest CFTC action, the Ooki DAO complaint issued today containing complex legal arguments over whether the governance token holders who vote in a DAO are liable, the complaint quietly labels under the surface the tokens on the Ooki scholarship as goods which gives the agency the necessary jurisdiction to file the complaint. Similarly, the SEC v. Wahi case against individuals accused of insider trading of tokens on the Coinbase exchange saw nine tokens labeled as crypto asset securities.

In fairness, both regulators are facing instructions from the White House of the first-ever crypto framework introduced last week as part of Executive Order 14067. In its context, the Biden administration is calling for “…regulators like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), in accordance with their mandates, to aggressively investigate and take enforcement action against illegal digital asset practices.”

However, the need for each agency to issue enforcement action may also create the opportunity for each of the regulators to stake their claim on which part of the crypto ecosystem they will regulate in the future. While Ethereum (ETH) is already widely regarded as a commodity for digital assets, DAI is certainly more interesting with much at stake for the MakerDAO Foundation who created the stablecoin as to whether DAI is a security or a commodity. DAI states that their stablecoin is not “algorithmically backed” but rather backed by other crypto tokens. This is different from Tether, which uses US dollars and its equivalents to back stablecoins, which was also claimed as a digital commodity in a CFTC complaint against Tether last year.

What is critical now is that if these enforcement actions are the method by which certain tokens are claimed by the SEC and CFTC as digital commodity tokens or security tokens, it would mean that some could interpret that the CFTC has just determined that DAI is now a digital asset. merchandise and no security.

In a recent Congressional Research Service (CRS) report titled “Stablecoins: Legal Issues and Regulatory Options,” SEC Chair Gary Gensler was quoted as saying, “…designation that would subject issuers to registration and reporting requirements.” In particular, the report highlighted how Gensler explained that the SEC would claim these stablecoins as securities if the token is part of an investment contract or that the stablecoin may represent “notes.”

Meanwhile, it still appears that neither the SEC nor the CFTC have issued guidance that would help clarify the landscape whether digital tokens are securities and commodities, making the current business environment for the industry difficult and stressful to navigate. With just a week to go before the end of the US government’s fiscal year, at a time when US regulators tend to enact enforcement before the end of the year, the pressure is on whether any particular symbolic project could be entangled. Getting caught up in the current ‘regulation by enforcement’ approach, the industry will likely be on high alert for any further complaints that could be filed by either regulator.