As regulatory enforcement actions unfold between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), the latter has subtly claimed that Ethereum (ETH) and DAI, a stablecoin backed by other crypto tokens, are digital commodities. The way these two tokens are confirmed is at the core of what may be a court battle between the two agencies over who can regulate cryptocurrencies.
With the CFTC’s latest action, the Ooki DAO Complaint released today that includes complex legal arguments regarding whether governance token holders who vote in the DAO are liable, and quietly beneath the surface, the complaint names Ooki tokens as commodities that give the agency the necessary jurisdiction to offer complaint. Similarly, the SEC v. Wahi case against individuals accused of insider trading of tokens on Coinbase saw nine tokens designated as crypto-asset securities.
In fairness, both regulators are facing instructions from the White House from the first-ever crypto framework introduced last week as part of Executive Order 14067. In this framework, the Biden administration is calling for “…regulators such as the Securities and Exchange Commission (SEC) to ) and the Commodity Futures Trading Commission (CFTC), consistent with their mandates, to Vigorously pursue investigations and enforcement actions against illegal practices in the digital asset space.”
However, the need for each agency to issue enforcement actions may also create an opportunity for each of the regulators to claim their own as to which part of the crypto ecosystem they will regulate in the future. While Ethereum (ETH) is already widely regarded as a commodity digital asset, DAI is certainly more interesting with a great deal at stake for the stablecoin creator MakerDAO as to whether DAI is a security or a commodity. DAI argues that its stablecoin is not ‘algorithm-backed’ but rather secured by other crypto tokens. This is different from Tether, which uses the US dollar and its equivalent to back stablecoins, which also claimed to be a digital commodity in a CFTC complaint last year against Tether.
What is important now is that if these enforcement actions are the way certain tokens are claimed as either digital commodity tokens or security tokens by the Securities and Exchange Commission (SEC) and the CFTC, then some may interpret that the SEC Commodity futures trading has just decided that DAI is now a digital commodity rather than a security.
In a recent report by the Congressional Research Service (CRS) titled “Stablecoins: Legal Issues and Regulatory Choices,” SEC President Gary Gensler was quoted as saying, “… that some stablecoins may qualify as “securities” under federal law-designation which would subject issuers to registration and reporting requirements.” Specifically, the report highlights how Gensler explained that the SEC will claim these stablecoins as securities if the token is part of an investment contract or if the stablecoin may represent ‘notes’.
Meanwhile, it still appears that neither the Securities and Exchange Commission (SEC) nor the CFTC has provided guidance that will help clear the landscape on whether digital tokens are securities and commodities, making the current business environment for the industry challenging and stressful. With only a week left before the end of the US government’s fiscal year, while US regulators tend to issue enforcement actions before the end of the year, the pressure on whether a particular token project might engage with the current “regulate through enforcement” approach is likely. The industry is on alert for any further complaints that may arise from any of the regulators.