Amid explosive growth in digital currency markets and a corresponding rise in misconduct plaguing the industry, the chairman of the Commodity Futures Trading Commission, Rostin Behnam, recently requested that Congress expand the CFTC’s enforcement powers and professed the agency’s readiness to serve as the “primary cop on the beat” for cryptocurrency markets. Implicit in this request is the recognition that the CFTC presently lacks the authority to lead the way in policing misconduct in digital currency markets — a conclusion supported by the Commodity Exchange Act (“CEA”), the statute from which the CFTC draws its enforcement powers. Yet, even as the agency appeals to Congress for expanded regulatory authority, the CFTC has behaved as if it already wields broad jurisdiction to police misconduct in digital currency markets.
In the meantime, Gary Gensler, chair of the Securities and Exchange Commission, has used a public speaking tour over the last several months to signal that the SEC already views itself as the “primary cop on the beat” for digital currency markets. For its part, the Department of Justice recently announced the launch of its own “National Cryptocurrency Enforcement” team. Not to be outdone, other federal enforcement agencies — including Financial Crimes Enforcement Network (FINCEN), Office of Foreign Assets Control (OFAC) and the Internal Revenue Service — have rushed to the forefront in policing the cryptocurrency industry as well.
What is going on here? The enforcement agency pile-on can, in part, be explained by the high incidence of fraud, money laundering, and — perhaps most critically — the widespread victimization of everyday Americans in cryptocurrency schemes of all stripes. But that is not the only driver. Just as enforcement agencies apply the old maxim “follow the money” to guide investigations, so too should anyone trying to understand why seemingly every U.S. enforcement agency is attempting to position itself as the lead horse in the cryptocurrency enforcement derby.
Clearly, the explosion of cryptocurrency investment and business has captured the attention of the nation and, by extension, its representatives in Congress. And wherever Congress focuses its gaze, taxpayer dollars — and expanded agency mandates — tend to follow. Thus, the enforcement agency that succeeds in portraying itself as best-positioned to address the rising tide of fraud and misconduct emanating out of the cryptocurrency industry stands to benefit from increased budget from Congress — and perhaps increased enforcement authority to go along with it.
For the CFTC, an enforcement agency that generally receives a far smaller slice of the federal enforcement budget relative to its peers at the SEC and Department of Justice, the explosive growth of the cryptocurrency industry has provided a golden opportunity to enhance its budget and expand its enforcement reach. No doubt recognizing that Congressional perception drives budget reality, the CFTC appears to be laser focused on brandishing its enforcement capabilities and asserting broad jurisdiction over digital currency markets. But this public posturing masks a core vulnerability in the CFTC’s enforcement authority — namely, the absence of a clear statutory foundation for the authority it purports to assert.
Although ostensibly confined by statute to policing fraud and manipulation in the futures markets, the CFTC has long sought to expand its jurisdictional reach by contending its authority extends not only to goods and products subject to future trading today, but also any good or product that might someday be subject to futures trading. Even within the CFTC, however, attempts to aggressively extend the agency’s enforcement authority provoked significant opposition, as when CFTC Commissioner Bart Chilton characterized the agency’s expansive definition of commodity as “circular” and enough to render the CEA’s statutory limits “meaningless.”
Notwithstanding this internal opposition, over the last five years, the CFTC has used a combination of pro se litigation, consent orders, and public announcements to create a perception of broad authority over digital assets and move its jurisdictional aspirations closer to reality. For example, in 2017 the CFTC used an enforcement action against unrepresented parties to obtain a consent order characterizing Bitcoin as a “commodity in interstate commerce.” Likewise, in 2018, the CFTC used another pro se litigation to generate favorable precedent for its broad characterization of digital currencies as “commodities.”
Having crossed that critical threshold, the CFTC then drew upon this “precedent” as a foundation to launch a multi-year enforcement blitz targeting a wide swath of cryptocurrency activity, further enhancing its public standing as a leading cryptocurrency enforcer along the way. Rather than engage in protracted — and costly — enforcement battles with the U.S. government, many investigation targets chose the path of least resistance, caving to CFTC settlement demands and submitting to consent orders that only serve to further cement the CFTC’s claim over expansive jurisdictional authority. Through parallel press releases and speaking tours, the CFTC used its success in cajoling these resolutions and steamrolling unrepresented litigants to promote its public standing as a leading enforcer of cryptocurrency misconduct.
In effect, the CFTC has relied on a snowball effect largely of its own making to generate greater leverage over enforcement targets to secure increasingly eye-popping penalties, despite its shaky jurisdictional footing. For example, in the recent Bitmex controversy, the CFTC (somehow) persuaded five targets to pay a US$100 million penalty for illegally operating a trading platform and alleged anti-money laundering violations. At the time, Acting Chairman Behnam touted the resolution as reinforcing “the expectation that the digital assets industry… takes seriously its responsibilities in the regulated financial industry and its duties to develop and adhere to a culture of compliance.”
But even as the CTFC aggressively expands its enforcement campaign in the digital currency arena, questions and skepticism about the agency’s jurisdictional authority to wage such a campaign stubbornly persist. Indeed, as recent statements made by Commissioner Dawn DeBerry Stump in connection with the Tether and Bitfinex settlement illustrate, agency overreach designed to create the perception of an ever-present “cop on the beat” comes with significant drawbacks, including leading investors to operate with a false sense of security in markets outside of the CFTC’s traditional purview. Moreover, the CFTC’s rush to take action in the absence of any clear statutory authority adds another layer of confusion to an already-opaque regulatory environment plaguing digital currency markets.
Ultimately, as digital currency continues to rocket toward mainstream adoption, it is hard to disagree that the inevitable rise in fraud and other misconduct corresponding with that explosive growth will require additional enforcement resources. And given its experience in policing markets populated by unregistered trading firms and sophisticated algorithms in derivatives markets, the CFTC may have a fair case for positioning itself as the most logical choice for expanded authority to lead enforcement efforts in digital currency markets. But unless and until Congress acts on Acting Chairman Behnam’s request for an expanded statutory mandate (and budget) to lead the charge, cryptocurrency exchanges and traders that find themselves on the wrong side of a CFTC enforcement investigation should not be so quick to concede that the agency has the necessary jurisdictional authority to act.
For now, the CFTC’s jurisdictional theories in this domain remain largely untested — at least in any material sense. With the help of experienced counsel with a track record of contesting CFTC theories, savvy investment targets can — and should — take advantage of that uncertainty to leverage far better results than would appear possible based on the headlines of the last several years.
