Regulatory Outlook: What are the priorities for the SEC and CFTC in 2024?

Author: Sarah Wynn, The Block; Compiled by: Songxue, Golden Finance

U.S. regulators will weigh whether to adopt new regulations that may include cryptocurrencies, and experts say more enforcement actions are underway.

It’s been a busy year for the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), ranging from filing lawsuits against some of the largest cryptocurrency exchanges, including Binance , Kraken and Coinbase, to consider regulations that could restrict the industry.

The SEC has not yet proposed regulations for a cryptocurrency center. Meanwhile, the CFTC voted in December to propose a rule aimed at strengthening customer protections following the collapse of cryptocurrency exchange FTX.

The Block spoke with experts to analyze the regulations these agencies may focus on in 2024.

SEC’s focus

SEC Chairman Gary Gensler has been emphasizing that most cryptocurrencies are securities , while calling on cryptocurrency exchanges to come forward to register, despite industry objections.

"In terms of cryptocurrencies in the broad sense, from the SEC's perspective, many cryptocurrencies appear to be compliant with securities laws, so I don't think the SEC will introduce a lot of new regulations in this regard," Investor Concerned Healthy Markets Association CEO Tyler Gellasch said. "I think they will continue to do what they have been doing, which is probably bring a lot of enforcement cases."

The SEC may adopt two recently proposed rules, one imposing requirements on custodians, Another expanded the definition of exchange to include decentralized exchanges.

Gellasch said: "I expect some form of these two rules will be finalized. We will see how much impact they will have on cryptocurrencies when they are finalized."

The upcoming election also makes it particularly important for SEC Chairman Gensler to finalize these rules, said Linda Jeng, Web3 advisor to the Crypto Council for Innovation. Jeng has served on the Board of Governors of the Federal Reserve, the SEC and the Treasury Department.

SEC Regulation

The U.S. Securities and Exchange Commission (SEC) voted to propose a rule in February , requires registered investment advisors to hand over cryptocurrencies to qualified custodians, who must comply with certain requirements.

Registered investment advisers are subject to custody rules that require them to place these assets in the custody of a qualified custodian, such as a bank or broker-dealer. The rules, which have not been updated since 2009, can now cover cryptocurrencies. SEC Chairman Gensler also warned that based on the way cryptocurrency platforms operate, investment advisors cannot rely on them as qualified custodians.

Jeng said there are not many custodians who know how to custody digital assets. "Then you force ... the industry to use custodians who may not have the necessary expertise," Jeng said. "That's a problem." Jeng said the rule could also lead to a concentration in a small number of registered custodians, which could lead to systemic financial stability risks.

SEC’s ATS Rules

The SEC also proposed a rule in January 2022, which Comments were reopened in April, expanding the definition of exchange to include decentralized exchanges. The rule could eventually require decentralized projects to register with the agency to become alternative trading systems.

Under ATS rules, DeFi projects will have to regularly submit documents to the SEC, be subject to mandatory disclosures, and have strict restrictions on how they operate, Healthy Markets’ Gellasch said.

"This industry was built and developed without regard to securities laws, so if the SEC adopts rules that require them to comply, their ability to operate could decline rapidly," Gellasch said. ”

Crypto Council’s Jeng said the rule could “destroy” decentralized exchanges to a certain extent, in part because the only way to comply with the rule is to become centralized.

CFTC latest rule proposal

More than a year after the collapse of FTX cryptocurrency exchange, the Commodity Futures Trading Commission (CFTC) ) voted in December to propose a rule aimed at strengthening customer protections for transactions through derivatives clearing organizations.

The rule, titled "Protection of Clearing Member Funds Held by Derivatives Clearing Organizations" ", DCOs that register with the agency and clear trades will be required to keep client funds, including funds from retail investors, separate from their own funds.

Gellasch said the agency may want to do this in the new era. Focus on the spot market during the year.

Gellasch said: "From the CFTC's perspective, there are a lot of things that may need to be done, especially focusing on how much access to the spot market they can gain. ”