In overseeing digital assets, the CFTC should use its existing authority, White House fact sheet says

A fact sheet published by the White House and an array of reports from various federal agencies arising from President Joe Biden’s March 9, 2022 Executive Order on Ensuring Responsible Development of Digital Assets encourage the Commodity Futures Trading Commission (CFTC) to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space” using its existing authority – rather than recommending that legislation be enacted granting it greater authority.

In this alert, we take a look at the fact sheet and the relevant reports. The recommendation, notably, is contrary to recently proposed legislation which seek to grant a greater mandate to the CFTC to regulate digital assets than it currently enjoys.

While the CFTC was not responsible for drafting and submitting any reports to the President, the Secretary of the Treasury was required to consult with the head of the CFTC about its report on measures to protect consumers, investors, and businesses, one of the priorities identified in the Digital Asset EO. The US Department of Treasury submitted a report titled “Crypto-Assets: Implications for Consumers, Investors, and Business” (the Treasury Risk Report).

The Treasury Risk Report contains six sections, with the first five focusing on an overview of the crypto-asset markets ecosystem; trends, uses, and opportunities in crypto-asset markets; risks and exposures for consumers, investors, and businesses; and opportunities and risks for populations vulnerable to disparate impacts. Each of these categories contains insights into how crypto-asset markets currently work – and may continue to work – for consumers, investors, and businesses; then the final section contains Treasury’s recommendations, which provides the best insight into what the representative agencies, including the CFTC, may focus on as they regulate crypto-assets in the near future.

Treasury made three recommendations, each of which may impact how the CFTC uses its existing authority. First, Treasury recommended that regulatory authorities vigilantly monitor the crypto-asset sector for unlawful activity, aggressively pursue investigations, and bring civil and criminal actions to enforce applicable laws.

To implement this recommendation, Treasury suggested that regulators increase investigation into misrepresentations to consumers and investors in crypto-assets. It stated that if trading, lending, borrowing, or other crypto-asset activity involves derivatives, then such activities must comply with the Commodity Exchange Act. Stating that maintaining crypto-assets as an enforcement authority and continuing to develop personnel and resources are important for investor protection, Treasury advised that agencies coordinate cross-agency enforcement actions. One example it cited: the Department of Justice’s Market Integrity and Major Frauds Unit, which has coordinated before with the CFTC (and other agencies as well).

Second, Treasury recommended that agencies use existing authority to issue supervisory guidance and rules to address current and emerging risks in crypto-asset products. This includes reviewing existing regulations to clarify regulatory requirements, address novel fraudulent practices, and enhance disclosure requirements. Treasury advised inter-agency collaboration , including forming new working groups to address emerging issues and creating formal agreements to coordinate enforcement actions. Finally, when issuing guidance, agencies should do so in “plain language,” readable and understandable to laypersons, technologists, and non-professional parties.

Third, Treasury recommends that agencies work individually and through the Financial Literacy and Education Commission (FLEC)  – of which the CFTC is a member – to help ensure that consumers, investors, and businesses can access trustworthy information on crypto-assets.

The Treasury Risk Report appears to conclude that federal agencies – among them the CFTC – currently have the necessary capabilities to properly protect consumers, investors, and businesses in the crypto-asset space. The agencies just need to use these existing authorities to better enforce the existing laws and regulations.

Based on recently introduced bipartisan legislation, the legislative branch does not concede that regulatory agencies have all necessary powers (see our coverage of the Digital Commodities Consumer Protection Act of 2022 here and our coverage of the Responsible Financial Innovation Act here). Instead, through these bills, the legislature seeks to empower the CFTC to be a more forceful presence in the crypto-asset space.

With that said, neither of these bills appears likely to pass during this legislative session. Therefore, the Treasury Risk Report and its emphasis on using existing powers, including through more aggressive enforcement actions, may be a preview of how regulatory agencies will proceed until new legislation is enacted that changes the regulatory authority of the relevant regulatory agencies.

To discuss these issues and more, DLA Piper is hosting a fireside chat with Rob Schwartz, General Counsel of the CFTC, on October 27, 2022 in our Washington, DC office. For more information, including how to RSVP, please see here.

For direct access to the seven reports which have released to date, please click the links below. DLA Piper is developing analyses of the additional reports and will release the analyses as they become available.

• Crypto-Assets: Implications for Consumers, Investors, and Businesses issued by the Department of the Treasury
• Responsible Advancement of U.S. Competitiveness in Digital Assets issued by the Department of Commerce
• Climate and Energy Implications of Crypto-Assets in the United States issued by the White House Office of Science and Technology
• How To Strengthen International Law Enforcement Cooperation For Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets issued by the Department of Justice
• The Future of Money and Payments issued by the Department of the Treasury
• Action Plan to Address Illicit Financing Risks of Digital Assets issued by the Department of the Treasury
• The Role of Law Enforcement in Detecting, Investigating, And Prosecuting Criminal Activity Related to Digital Assets issued by the Department of Justice

Please also see the other two alerts in this series, Responding to Biden Executive Order, OSTP report addresses climate and energy implications of digital assets and blockchain technology and Commerce Department lays out US path to global leadership on digital assets.