The Best Way to Regulate Digital Assets: Merging the SEC and CFTC

Now that President Trump has signed the GENIUS Act into law to regulate stablecoins – cryptographic tokens whose value is pegged to the dollar – Congress is passing crypto “market structure” legislation to regulate the issuance and trading of digital assets.¹ While the current proposals have some benefits, they could do more harm than good. Instead, we should consider a different path: merging the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The objectives of market structure legislation

Market structure legislation should aim for four key objectives, all of which can best be achieved by merging agencies. Additionally, the merger is arguably essential if the path forward for our financial markets involves the tokenization of securities and derivatives and the development of platforms trading multiple types of products, which crypto enthusiasts and the chairs of the SEC and CFTC see as the future.²

The first goal should be to create federal regulation of the “spot market” for digital assets that are not securities. Pending proposals assign this task to the CFTC, but it would be better to involve the SEC as well. Effective regulation will require disclosure to investors of listed and traded tokens. Disclosure has been the primary responsibility of the SEC since its inception nearly 100 years ago, but it is not the responsibility of the CFTC. Additionally, the SEC has more experience than the CFTC when it comes to retail markets.

A second goal is clarity in the classification of digital assets: when is a token a security, a commodity, or something else? We need an administrative process that can take into account several factors, including the function of a token and the context in which it is offered, sold or exchanged. For example, is the token used to raise funds for a business or to grow a network? Does the token represent an interest in a decentralized network or is there a controlling person? A merged SEC and CFTC can better develop a nuanced taxonomy and standards that can evolve with the market and use cases.

To date, the classification has been debated in court, the outcome of which determined whether there was complete regulation (if the token was considered a security) or no regulation (if it was not). Once we regulate the spot market, the classification will primarily dictate what disclosure is required and who must provide it, and this may change as the function and ownership of a token evolves over time. Having the SEC and CFTC working together will ensure that there is a continuum of standards addressing the evolution of tokens.

A third objective of the legislation should be to ensure that the “back office” regulations that already exist for traditional finance – those relating to the reporting, recording, clearing, settlement and custody of financial instruments – work for tokenized assets and blockchain technology. This is particularly important if tokenization of existing securities and derivatives takes off. Current rules hinder the development and use of tokenization. The new rules should have the same result regardless of whether a token is a security or a commodity. This is critical as we move toward platforms that trade multiple product types – something the SEC and CFTC chairs recently approved – and as a token’s classification evolves over time.

The final key objective should be to strengthen the tools that authorities can use to prevent illicit financing. The legislative proposals subject crypto intermediaries to rules applicable to banks, meaning they must verify the identities of transacting parties, file suspicious activity reports, and implement sanctions or other measures to block transactions. This is insufficient since digital assets can be easily transferred without going through intermediaries. Any new rules must achieve the same result whether a token is a security or a commodity. This creates efficiency for intermediaries as well as law enforcement authorities.

Why the current approach is flawed

The danger of current market structure proposals lies in the way they attempt to clarify the classification of digital assets. This approach has the potential to undermine our existing securities and commodities regulatory frameworks. The proposals contain lengthy and complex exemptions from securities laws and other provisions intended to promote technology. They will be difficult to administer and even more difficult – if not impossible – for regulators to correct when flaws are discovered. Lawyers will leverage complexities to reduce compliance burdens for their clients. The proposals also promote current business models that could become obsolete; for example, new blockchains being developed may not meet legislative definitions.

Republicans sponsoring these proposals appear to be fighting the last war, when Biden administration regulators resisted the technology. But that doesn’t account for the tectonic shift in regulation under the Trump administration. The SEC and CFTC are now doing what the crypto industry has been looking for for four years, which is to develop rules and guidance.³ I may not agree with everything they do, but at least it’s done through public notice and comment procedures. The legislative process is no better way to achieve this.

Meanwhile, opponents (mostly Democrats) in Congress face a daunting challenge. They dislike the current proposals because of the risks of regulatory arbitrage and because they believe any legislation should resolve conflicts posed by the crypto business interests of President Trump and his family.⁴ But opposition to any legislation could leave them vulnerable and become the target of another tsunami of campaign contributions from the crypto industry, as has been seen in 2024.⁵

The pros and cons of a merger

Merging the SEC and CFTC has been suggested several times before, but the political stakes have always been difficult. The House Financial Services Committee and the Senate Banking Committee oversee the SEC, while the respective agriculture committees oversee the CFTC. This reflects the origins of the CFTC, which began as an office within the Department of Agriculture because of the importance of the agricultural future to farmers.

Having had the honor of chairing the CFTC, I apologize to my former colleagues if they feel I threw them under the bus. But a merger could be a boon for the CFTC’s historic mission of regulating derivatives markets in physical commodities like agricultural products, metals and energy. These markets are critical to the global economy and the livelihood of farmers and many other businesses throughout supply chains and may not be receiving enough attention given the recent expansion of the CFTC’s mission to crypto and prediction markets.

A merger could strengthen the importance of these markets. We could create a vice chair to oversee regulatory responsibilities for historic commodities, just as we created a vice chair for oversight at the Federal Reserve Board. This position could be subject to confirmation and oversight by the Congressional agricultural committees, thereby retaining their oversight role and facilitating legislative enactment of the merger. The new agency should receive a new name, like the Financial Markets Agency. This is not an acquisition and we must establish a new common culture.

Some may argue that the crypto markets are not big enough to warrant a drastic step that we have refused to take in the past. Certainly, the economic utility of crypto markets today pales in comparison to the securities market (and its importance for capital formation) and the commodity derivatives market (and its importance for price discovery and hedging). Much of the crypto activity thus far has not been transformative but merely speculative, driven by a desire to drive up the price of tokens that lack financial or economic utility. But the calculus for mergers changes if we think tokenization will become important to traditional markets.

While merging is a step we do not wish to take, there are other ways to facilitate coordinated regulation among agencies. In 2022, Professor Howell Jackson of Harvard Law School and I proposed a self-regulatory organization, jointly overseen by the SEC and CFTC, as a way to regulate crypto markets without congressional action.⁶ The basis for this proposal was the importance of regulatory coordination. Professor Jackson and I explore other options in a soon-to-be-published article that discusses coming changes to our financial markets. At a minimum, Congress should mandate joint rulemaking on classification issues and set general principles rather than prescriptive rules.

Conclusion

Congress could eventually pass legislation modeled on the current Republican market structure proposal.⁷ given pressures from crypto industry lobbying and campaign contributions. But legislation setting some broad goals and either merging the SEC and CFTC or creating the institutional means for them to work closely together would be a better solution. Democrats could turn this around by adopting an approach that is not only beneficial for regulation and innovation, but also beneficial for government efficiency. And President Trump may be just the president who can get a sense of when he may have finally crossed the finish line.