Technology × Freedom

Government Regulators Have Their Sights On the New Digital Currency Derivatives Market

August 15, 2017 invisiblehand

In a recent CoinDesk article, Benjamin Sauter and David McGill warn that government regulatory agencies are likely to increase their scrutiny of digital currency trading in the near future. They write:

There is more than meets the eye to recent announcements that LedgerX and CBOE will soon be offering digital currency derivatives in the U.S.

With digital currency derivatives trading set to begin, the CFTC may well have found the jurisdictional allies it needs to breach the wall. At a minimum, one can expect the CFTC to assert authority over trading practices on the underlying digital currency markets that provide reference prices for the newly approved derivatives products.

But because the digital currency markets and related derivatives markets are all linked through arbitrage, there may be no natural stopping point once the CFTC crosses the threshold. That could mean a new regulator sitting on the digital throne.

But there's another sheriff in town: the Securities and Exchange Commission. And it also wants a piece of the regulatory-power pie.

The SEC's recently published "Report of Investigation" on The DAO and signals that new coin offerings may be deemed "securities" subject to SEC oversight.

A key implication of this finding is that the secondary trading of these securities would fall under the SEC's Section 10(b) anti-fraud mandate – including its prohibitions on market manipulation and insider trading. In other words, the SEC appears to have just carved for itself a large slice of the underlying digital currency markets, at least with respect to newly issued digital currencies.

What about existing cryptocurrencies? That remains to be seen. But the newfangled derivatives market could be the perfect back door government regulators need to get at the underlying digital currencies and slowly expand their jurisdiction. The authors' conclusion is not promising:

Regardless of whether the SEC, the CFTC or both ultimately assert power over trading in the digital currency markets, recent developments suggest that a new regime is coming. Digital currency traders in the U.S. and abroad should prepare for a long winter of uncertainty and, ultimately, regulatory scrutiny of trading practices.

Sauter and McGill are members of the Digital Currency & Ledger Defense Coalition, "a group of over 50 lawyers dedicated to protecting US blockchain innovators."