CFTC’s Approach In KuCoin Case May Undermine SEC’s Authority, Commissioner Warns

Following a recent lawsuit against prominent crypto exchange KuCoin, Caroline D. Pharm, a Commissioner at the Commodity Futures Trading Commission (CFTC) has warned that the agency may be infringing on the Securities and Exchange Commission’s authority in regards to securities trading. This development comes as both financial regulators continue the tussle over the control of the crypto space amidst the lack of a clear regulatory framework for the US crypto industry.

CFTC May Be Tampering With Investor Protection Law, Pharm Says

On March 26, the CFTC, alongside the US Department of Justice, filed a lawsuit against KuCoin and two of its founders for conspiracy to violate the Bank Secrecy Act and conduct an unregistered money transmitter operation. The petition, which was submitted in the Southern District of New York, also charges all parties for not conducting the required know-your-customer practices and breaching the US anti-money laundering laws.

Commenting on this development in a public statement released on March 29, the CFTC commissioner Caroline Pharm states the agency has taken an “aggressive” stance in performing its duties in regards to halting the operations of an unlicensed crypto derivatives trading firm. While Pharm commended the CFTC’s commitment and alertness in safeguarding the US financial markets, the commissioner says this recent lawsuit may undermine the SEC’s jurisdiction over securities trading.

This is because the CTFC complaints against KuCoin claim that according to Section2(c)2(D) of the Commodity Exchange Act, securities can be used in leverage trading, which regulation falls under the agency’s authority; Commissioner Pharm warns that the interpretation of this law does not provide enough differentiation of security and the trading activities of one. 

Thus, Pharm states that the CFTC’s argument in this latest lawsuit could infringe on the SEC’s jurisdiction as well as threaten the validity of existing investor protection laws. The Commissioner said:

The CFTC’s approach may infringe upon the SEC’s authority and undermine decades of robust investor protection laws by conflating a financial instrument with a financial activity, disrupting the foundations of securities markets. Owning shares is not the same thing as trading derivatives.”

The Crypto Turf War Continues

Over the last few years, the CFTC and the SEC have battled for regulatory supremacy over the robust US crypto industry. While the CFTC continues to regulate the crypto futures and derivatives trading and the SEC focuses on processes involved in initial coin offerings (ICO), both regulators have attempted to gain greater control of the crypto space. 

Back in March 2022, the CFTC chairman Rostin Behman in a testimony before the Senate Committee on Agriculture, Nutrition, and Forestry, openly called for an expansion of the agency’s jurisdiction to other aspects of digital asset trading, 

This is a similar call to repetitive petitions by the SEC’s boss Gary Gensler who is also seeking greater authority from the US Congress to exert an increased influence on crypto regulations. Obviously, the existing battle between both regulators for higher regulations is unbeneficial to crypto investors and only signals the need for the hastening of the legislative process involved in the creation of clear crypto regulations. 

Total crypto market cap valued at $2.561 trillion | Source: TOTAL chart on Tradingview.com