The Commodity Futures Trading Commission’s oversight of the fast-growing cryptocurrency market is on hiatus as the government shutdown lingers.
The halt comes at an inopportune time for virtual currency companies that want to evolve to become like more traditional financial players.
Crypto exchange startups looking to register as brokers with the CFTC may find their applications frozen. New rules on swaps trading platforms—which could impact how crypto exchanges are regulated further down the line—may also be delayed. The pause also increases the chances for virtual currency market manipulators to skirt the agency’s oversight.
“The shutdown is a very real threat to a nascent industry,” John Collins, partner at FS Vector, a virtual currency and fintech advisory firm, told Bloomberg Law.
Only 61 staffers, or about 9 percent of the CFTC’s workforce, are working on essential operations overseeing derivatives markets, according to an agency shutdown memo. The agency’s rulemaking and enforcement activities, including some critical cases around broader commodities market manipulation, are feeling the effects.
“It’s an agency working at 10,000 feet right now,” Covington & Burling LLP counsel Anne Termine, who was a CFTC trial attorney during the 2013 government shutdown, told Bloomberg Law.
Crypto Agenda on Ice
The agency has been working on final rules that could alter how some crypto exchanges are classified, a signature policy for outgoing CFTC Chairman Christopher Giancarlo. The shutdown could thwart efforts to finish the rules before Giancarlo’s term expires in April.
The proposal seeks to loosen regulations governing trades on swaps-trading platforms called swap execution facilities (SEFs). It would also expand the number of platforms that would have to register as a SEF. The changes could drive more cryptocurrency exchanges to be classified as SEFs. That could mean they would be subject to more stringent requirements than if they were to remain as merely introducing brokers.
The freeze comes just as a portion of the crypto trading market is maturing to serve institutional investors, Kari Larsen, partner at Perkins Coie LLP in New York, told Bloomberg Law. “There are a whole host of exchanges and decentralized exchanges that are looking to go the registered route,” Larsen said. The shutdown will delay all registrations and the SEF proposal introduces more regulatory uncertainty for their future, she said.
Other crypto activities overseen by the agency are on ice. Review of comments to help the CFTC better understand cryptocurrency Ether and blockchain network Ethereum is likely to be delayed.
The agency also has had to shelve a rulemaking on the application of “actual delivery” requirements on virtual currency transactions, which could impact when traders or exchanges would have to register with the agency. The rules would generally help determine when a crypto transaction is a sale and when it may be considered a futures contract.
The CFTC will only fall further behind if the shutdown drags on, Justin Slaughter, a consultant with lobbying firm Mercury Strategies and former chief policy adviser to former Commissioner Sharon Bowen, told Bloomberg Law.
“The CFTC is already an under-resourced agency, with 700 people trying to regulate several hundred trillion dollars of financial markets,” he said. “Taking people off the job for weeks or months makes policing and protecting those markets go from a nearly impossible job to actually impossible.”
Industry in the Dark
A prolonged shutdown will only heighten operational and funding worries for crypto startups, FS Vector’s Colllins said.
“When you have something that is as small and as sensitive to all kinds of various market forces, which this industry certainly is right now, any sort of hiccup can be existential,” Collins said.
The shutdown’s impact on traditional commodities markets are minimal for now, but that too could change.
Routine communications between agency staff and industry officials—representing exchanges, clearing organizations and the National Futures Association—for approvals, filings or other matters have gone largely silent with no one to pick up the phone at the CFTC.
“Every day, something occurs that requires judgment,” Gary DeWaal, special counsel at Katten Muchin Rosenman LLP in New York, told Bloomberg Law.
The courts are also waiting on the CFTC.
A judge, citing the shutdown, recently paused CFTC v. Kantor, in which the CFTC alleged that an ex-broker was the mastermind of a $2.1 million crypto fraud.
Due to the shutdown, the CFTC also received an extension to March 1 to seek an appeal in a highly-watched futures contracts manipulation case, CFTC v. Wilson. The case tested the agency’s pre-Dodd Frank market manipulation enforcement authorities. A judge ruled in favor of defendants DRW Investments, LLC on Dec. 3.
CFTC v. Monex is still scheduled for March 13 oral arguments. The commodities industry is keeping a close eye on the case, which could change the agency’s enforcement authority under the 2010 Dodd-Frank Act.
An extended shutdown could impact the agency’s preparation for oral arguments. “In litigation, March is around the corner,” Termine said.