Outgoing Commodity Futures Trading Commission (CFTC or Commission) Commissioner Dawn Stump recently issued a challenge to her fellow commissioners to move past simply enforcing the CFTC’s rules as they exist and to do the hard work of setting more clearly defined regulatory expectations for innovative applications in derivatives market infrastructure.

This is not the first time Commissioner Stump has been critical of the CFTC’s enforcement-focused approach to the digital assets space. In a concurring statement, she called on the Commission to clarify the application of its futures commission merchant (FCM) rules to digital asset exchanges. In statements and speeches, she has called on the CFTC to be clear about the limits of their regulatory authority to act in the spot market. Securities and Exchange Commission (SEC) member Hester Peirce has voiced similar concerns at her agency, observing that it is relying too heavily on enforcement actions without providing clarity on the application of the SEC’s rules to the digital assets space.

Stump’s call for the CFTC to “do the hard work” of providing guidance to innovative market entrants highlights one of the long-standing challenges legislators and policymakers regularly face: address emerging technologies that no longer fit the existing regulatory framework. It is a tall order, but policymakers and legislators have risen to the challenge in the past.

Reaching consensus on Capitol Hill to pass laws that could provide meaningful guidance on any of these issues could be elusive in 2022, although not completely out of the question. As described in an earlier Patomak Post, the current Congress is increasingly divided, largely along party lines, about how to regulate stablecoins, decentralized finance, and central bank digital currencies, to name a few areas of focus. This dynamic is further complicated by the fact that it is an election year.

Regulators and Executive Orders Fill the Void

Meanwhile, the Biden Administration is still developing its own views. In the absence of a cohesive approach from Congress, regulators – including the SEC, CFTC, Treasury, the Federal Reserve System, and the Office of the Comptroller of the Currency– will continue to develop their own disparate approaches to regulating this space in ways that may conflict and expand their own jurisdiction at the expense of other regulators. The Biden Administration has also signaled a willingness to use the Financial Stability Oversight Council’s powers to craft new rules for certain part of the digital assets industry if Congress does not act soon.

The Biden Administration may soon, however, make a push to better inform its approach. It is reportedly drafting an executive order for digital assets that is expected to call on the federal agencies to submit reports outlining the risks and challenges with digital assets and call on other government agencies to report on how digital assets may overlap in their areas of jurisdiction.

Until policymakers and regulators do the hard work of finding the right balance between appropriate market protections, national security considerations, and the need to support innovation, high-profile enforcement cases are likely to provide piecemeal guidance to the industry.

Patomak Global Partners Can Help Navigate Uncertain Waters

As companies face these choppy waters, Patomak is poised to help assess and navigate emerging risks related to public policy developments in Washington and internationally. We work regularly with digital asset trading platforms, venture capital funds, fintechs, and other financial firms in the digital asset arena.

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