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.