Wall Street Cops Team Up for Crypto Clarity After Shedding Staff

Two major Wall Street regulators are joining forces to provide regulatory certainty to cryptocurrency newcomers, but they stopped short of a full tie-up, each with about 20% fewer employees on hand to enforce any new rules.

Crypto industry players, dual registrants, and others that have found themselves subject to duplicative or conflicting standards from the Securities and Exchange Commission and the Commodity Futures Trading Commission stand to benefit from the agencies’ latest efforts to boost cooperation on rulemaking, examination, and enforcement, according to financial regulatory lawyers.

The SEC and CFTC are “reorienting our approach toward a new golden age of regulatory coherence,” SEC Chairman Paul Atkins said at a futures industry conference this month. While the SEC was created following the 1929 stock market crash to regulate securities, and the CFTC focuses on commodity futures and derivatives trading, new digital assets have blurred those distinctions and the agencies have failed to keep up, he said.

His statements were followed up by an interagency agreement to provide a “fit-for-purpose regulatory framework” for crypto assets and new “token taxonomy” from both regulators defining which types of digital assets each will oversee. The SEC and CFTC have even discussed housing their employees in the same building.

The latest moves all point toward a “de facto merger,” said Lee Reiners, a lecturing fellow at Duke University’s Financial Economics Center.

Reiners, who revived a conversation on the benefits of an SEC-CFTC merger during the Department of Government Efficiency’s regulatory downsizing campaign, sees the latest alignment as an attempt to reassure a crypto industry concerned about overlapping rules and litigation risk, without the full-scale sharing of agency resources.

“In a lot of ways, this is just making it easier for firms like Coinbase and Robinhood to continue full steam ahead with everything that they have been doing and want to do, without having to worry about being found offside by any given agency,” he said.

But statutory requirements draw clear jurisdictional boundaries that will pose a hurdle for fully integrating SEC and CFTC functions, agency watchers said. And even if some industry advocates welcome a lean regulatory apparatus, the agencies’ bid to cooperate can only go so far if they don’t have enough personnel to ensure crypto market participants play by the rules.

Staff Departures

In announcing their alliance, neither agency addressed anticipated workload increases following staff buyouts and other departures during President Donald Trump’s second term.

Earlier this week, SEC Enforcement Director Margaret Ryan abruptly resigned, after the agency lost more than 800 employees over the past year, according to Office of Personnel Management data.

The attrition rate was more than 20% at the CFTC, which Chairman Michael Selig is currently running by himself while the four other commissioner seats remain vacant.

Democratic senators wrote to Selig last month, raising concerns about a report from Barron’s that the CFTC’s office in Chicago—a classic derivatives trading hub—now has no enforcement attorneys, down from 20 before Trump returned.

The CFTC, which is also pushing for more authority to regulate prediction markets, may be straining under its current headcount.

“They’ve got to start ramping up big time, not just lawyers, but consultants, experts, economists,” said Anthony Valenzuela, a partner at Davis Wright Tremaine LLP specializing in financial services regulation.

“At the end of the day, the SEC can’t do the CFTC’s work,” he said.

The CFTC declined to comment. The SEC didn’t respond to multiple comment requests.

Onshoring Crypto

By aligning, the SEC and CFTC are addressing a top item on the crypto industry’s wish list: clarifying which digital assets fall under which agency’s jurisdiction.

Most crypto assets and transactions—including digital commodities, collectibles, and token airdrops—don’t involve a “security” under Depression-era laws and won’t be regulated by the SEC, according to the agencies’ March 17 guidance.

“This is what regulatory agencies are supposed to do: draw clear lines in clear terms,” SEC Chairman Paul Atkins said in a press release.

The agencies said their moves complement legislation advancing in the US Senate that would codify similar changes.

The SEC under Atkins has also abandoned the Biden administration’s bid to police digital tokens for registration failures, an approach criticized by Trump-era officials and the crypto industry as “regulation by enforcement.”

The regulators emphasized this week that they want to help the crypto industry flourish in the US by minimizing regulatory requirements and reducing litigation risk.

“The Trump administration saw a lot of these US innovators and investors going to Dubai, going to Singapore, going to Europe to do business,” Valenzuela said. Coinbase, Gemini, and Ripple Labs are among the crypto businesses that have pursued licenses abroad.

Getting rid of regulatory overlap means “businesses aren’t going to have to hire two separate counsels, for example, to respond to these exams and enforcement actions,” he said.

Substituted Compliance

Atkins has touted a substituted compliance model, similar to when different jurisdictions deem their requirements satisfied by a company following a particular set of foreign regulations.

At his industry conference speech this month, he also likened combined supervision to a “super-app,” borrowing a tech industry term for a platform that integrates multiple services into one user interface.

“Applying that concept domestically would probably mean that you’re going to see the SEC and CFTC agreeing in some part that compliance with one agency’s particular framework is going to satisfy the overlapping requirements of the other,” said Sarah Razaq Sallis, a partner at Husch Blackwell who handles SEC examinations and cross-border matters.

“For firms that are dual registrants, like swap dealers and certain trading platforms, that has significant potential to reduce the duplicity of their regulatory obligations,” she said.

While previous attempts at harmonization focused on rulemaking, the agencies are also talking about changes in their day-to-day work policing crypto and other companies.

“Enforcement is actually where you’re going to see the most significant shift in coordination,” Sallis said.