A request for input from the Commodities Futures Trading Commission (CFTC), seeking to improve its understanding of the ethereum blockchain, has demonstrated a “fundamental” lack of knowledge at the regulator.
“It seems to not have a very good understanding of ethereum overall,” says John Quarnstrom, founder of ethereum options firm Inveth. “Some of the questions posed didn’t necessarily seem like the CTFC has someone internally who understands the technology, even at a fundamental level.”
“I’m always happy when people want to learn, but once I read the questions, they just didn’t make sense,” adds Nicholas Fett, CEO and founder of Daxia, a tokenized derivatives platform. “I’ve presented to the CFTC, I know tons of people who build on ethereum and have presented to the CFTC, and yet it asked some simple questions.”
“It was asking questions like ‘what’s the difference between the ethereum and bitcoin blockchain’. As a developer, I see that as a huge distinction. The CFTC also wanted to know what would happen if there was a fork in the ethereum chain, and whether funds would be replicated or split. I really think they’re trying to understand how to approach regulating things.”
Due to the ongoing government shutdown in the US, the CFTC is not responding to questions.
“In my mind, the reasoning for this RFI is not that the commission deeply yearns for knowledge on ethereum,” says Fett, who instead believes the regulator is setting itself to prevent ethereum exchanges from attempting self-certification.
Following the self-certification of CME Group’s bitcoin futures platform in December 2017, trade organization FIA and its clearing member firms wrote an open letter complaining of a “lack of transparency and public discussion” around the self-certification process.
“I really wish [the CFTC] would take a laissez faire approach to cryptocurrencies but given how many issues there have been with ICO scams, market manipulation and more, its fighting an uphill battle,” says Quarnstrom. “It does need to regulate it, but it needs to be clearer, instead of applying its broad acts.
“The best response from the CFTC for the community is to have an entirely different section of the Commodity Exchange Act (CEA) that regulates cryptocurrencies in a different way,” adds Quarnstrom. “Back in 2014 it said bitcoin and all other virtual currencies were commodities, and now its backtracked and realized that maybe it doesn’t apply as well. It’s just too much of a different asset class. We need to A) write a whole new framework or a whole new section or B) for the CFTC to say, ‘we’re not equipped to regulate these assets’.”
The Commodity Exchange Act, which provides federal regulation for all commodities and futures trading activities, was enacted in 1936. In its history, only two amendments have been made to the Act: the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in the wake of the global financial crisis by President Barack Obama, and the Economic Growth, Regulatory Relief and Consumer Protection Act, signed by Obama’s successor, Donald Trump.
Quarnstrom believes it’s a US weakness to attempt to port old world regulations into the cryptocurrency space. “It’s disappointing not to see the US attempt what other countries have and create a virtual currency act. At a state level we’ve seen some changes to money transmitter laws and some states have said that they’ll avoid regulation entirely. I think it’s a weakness at a federal level.”
“You see a lot of warnings on trading sites: ‘no customers from Syria, North Korea, Iran, or the US’,” says Fett. “I don’t think the issue is necessarily crypto though. The rules regarding restricting non-registered companies coupled with the gargantuan regulatory requirements needed to start a financial company have been around for a long time. Crypto just brought it into the spotlight.”
Despite his criticism of the organization, Quarnstrom stresses that he wants the CFTC to understand the possibilities of cryptocurrency. “When I saw [the RFI] I sat down and wrote for six hours. Ultimately, I tried to push it a little bit and open its eyes, as I don’t think [the CFTC] is too aware of the potential applications of cryptocurrency. It needs to allow the industry to grow.”