cryptocurrency

Lawmakers and cryptocurrency experts agreed Wednesday that the Securities and Exchange Commission and the Commodity Futures Trading Commission should write rules to set out when a token is a commodity or a security.

“Under current practices, it is difficult to determine whether a token is a commodity or a security,” Mike Lempres, chief legal and risk officer at Coinbase, told lawmakers during a Wednesday hearing held by the House Financial Services Subcommittee on Capital Markets titled “Examining the Cryptocurrencies and ICO Markets.”

The SEC and CFTC “could easily draw a line to determine whether a token should be treated as a commodity or a security for compliance purposes,” Lempres said.

“The agencies have done this before when new asset classes emerge,” he continued. “For example, in addressing stock indexes (generally narrow-based indexes are securities, broad-based indexes are commodities, with mathematical way to make determination) and swaps (generally the SEC has jurisdiction over swaps with securities as the underlying asset; the CFTC retains jurisdiction over all other swaps).”

Coinbase, Lempres explained, operates a spot exchange and limits trading to four cryptocurrencies that have “regulatory clarity”: Bitcoin, Ether, Litecoin and Bitcoin Cash.

“We do not support any [initial coin offerings] at the current time because we’re not sure of the regulatory climate or treatment,” Lempres told the lawmakers. “We are waiting for the dust to settle between the CFTC and SEC on the regulation of ICOs. There is an important distinction between what is a security and what is a commodity; they do need to be treated differently.”

Robert Rosenblum, a partner in the Washington office of the Palo Alto, California-based law firm Wilson Sonsini Goodrich & Rosati, who heads the law firm’s Blockchain and Cryptocurrency practice, suggested at the hearing that regulators should devise “a simple, easy system to use that will apply to all of these [types of cryptocurrencies], regardless whether they are securities.”

A “simple system that works for both” securities and commodities will help prevent lawyers from arguing “with each other and with the SEC over which side of the line it is,” Rosenblum said.

Congress, Rosenblum opined, “should pass legislation in the near term that will authorize and direct regulators to modify or eliminate regulations that needlessly impede the innovation and capital formation opportunities offered by the development of blockchain and cryptocurrency technologies, while at the same time assuring that appropriate provisions are in place to protect token investors and token users.”

Longer term, he continued, “Congress should pass legislation establishing a comprehensive legislative and regulatory system governing blockchain and cryptocurrency in the United States.”

While it’s “too early to know exactly what such a system would look like,” Rosenblum added, “I believe there are some principles and approaches that Congress can identify now, and that these can serve as a framework to begin developing that legislation.”

Rep. David Scott, D-Ga., queried those testifying at the hearing on whether the CFTC and SEC needed to propose rules on the regulation of cryptocurrency, instead of continuing their current enforcement actions or “informal rulemakings” and guidance.

“What could they do better?” Scott asked. Are “enforcement actions and guidance sufficient?”

Rosenblum responded that “regulation by enforcement in an area as dynamic as this is not the appropriate way to regulate.” Enforcement is “necessary, but we need clearer guidelines … on how SEC rules apply. That is not something you can do by regulation by enforcement.”

The SEC, Rosenblum said, “could be doing a lot more to amend their rules and modify their rules, and this committee could help.” The committee, he added, could also “lead the way to having a more unified approach” to regulation in this space among the financial regulators.

— Check out The Advisor and the Quant: Cryptocurrencies and Financial Planning on ThinkAdvisor.