A Proposal for Oversight of Digital Asset Spot Markets in the U.S.

Recent turmoil in the digital asset market has renewed calls for greater oversight of the sector. Unfortunately, the uncertain legal status of digital assets in the U.S. complicates efforts to more vigorously regulate them. The Commodity Futures Trading Commission (“CFTC”) has classified Bitcoin and Ether – and by extension other cryptocurrencies that are similarly structured – as commodities (courts have also upheld this classification). While the CFTC regulates commodity derivatives, they do not regulate commodity spot markets, although they do have enforcement authority for fraud and manipulation in commodity spot markets. The practical effect of this structure is that cryptocurrency exchanges in the U.S. are not regulated at the federal level (they are required to register with the Financial Crimes Enforcement Network and obtain state money transmitter licenses). This article explores potential options for addressing the gap in digital asset spot market regulation and recommends that Congress grant the Securities Exchange Commission exclusive authority over all facets of the digital asset market, from spot to derivatives, by creating a special definition of security under the securities laws that would incorporate digital assets.

By Lee Reiners^[1]

I. INTRODUCTION

Recent turmoil in the digital asset market has renewed calls for greater oversight of the sector.^[2] The good news is that the digital asset selloff has not – thus far – spilled into the