The best way to regulate digital assets: Merge the SEC and CFTC

Now that President Trump has signed into law the GENIUS Act to regulate stablecoins—a crypto tokens whose value is pegged to the dollar—Congress is taking up crypto “market structure” legislation to regulate the issuance and trading of digital assets.¹ Although the current proposals have some good features, they could do more harm than good. Instead, we should consider a different path—merging the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The objectives of market structure legislation

Market structure legislation should have four key objectives, all of which can best be achieved by merging the agencies. Moreover, merger is arguably essential if the path forward for our financial markets involves tokenization of securities and derivatives and development of platforms that trade multiple types of products, which is what crypto enthusiasts and the chairs of the SEC and CFTC believe is the future.²

The first objective should be to create federal regulation of the “spot market” in digital assets that are not securities. The pending proposals assign that task to the CFTC, but it would be best to involve the SEC as well. Effective regulation will require disclosures to investors about the tokens that are listed and traded. Disclosure has been the SEC’s core responsibility since its creation almost 100 years ago but not a responsibility of the CFTC. In addition, the SEC has more experience than the CFTC with retail markets.

A second objective is clarity in the classification of digital assets—when is a token a security, a commodity, or something else? We need an administrative process that can consider multiple factors including the function of a token and the context in which it is being offered, sold, or traded. For example, is the token being used to raise money for a business or development of a network? Is the token an interest in a decentralized network or is there a controlling person? A merged SEC and CFTC can best develop the nuanced taxonomy and standards that can evolve with the market and use cases.  

To date, classification has been fought out in the courts, where the outcome determined whether there was comprehensive regulation (if the token was deemed a security) or no regulation (if it was not). Once we regulate the spot market, classification will mostly dictate what disclosure is required and who must provide it, and that may change as the function and ownership of a token changes over time. Having the SEC and CFTC work as one will ensure that there is a continuum of standards that addresses how tokens evolve.

A third objective of the legislation should be to ensure that “back-office” regulations that already exist for traditional finance—those pertaining to the reporting, recording, clearance, settlement, and custody of financial instruments—work for tokenized assets and blockchain technology. This is especially important if tokenization of existing securities and derivatives takes off. Current rules hinder the development and use of tokenization. New rules should have the same outcome regardless of whether a token is a security or a commodity. That is essential as we move toward platforms that trade multiple types of products—which the chairs of the SEC and CFTC have recently endorsed—and as the classification of a token changes over time.

The final key objective should be to strengthen the tools authorities can use to prevent illicit finance. The legislative proposals make crypto intermediaries subject to the rules that apply to banks—which means they must check identities of transaction parties, file suspicious activity reports, and implement sanctions or other measures to block transactions. That is insufficient since digital assets can be easily transferred without going through intermediaries. Any new rules need to achieve the same outcome whether a token is a security or a commodity. It creates efficiency for intermediaries as well as for law enforcement authorities.

Why the current approach is flawed

The danger of the current market structure proposals is the way they try to provide clarity in the classification of digital assets. The approach is likely to undermine our existing frameworks for securities and commodities regulation. The proposals contain lengthy, complex exemptions from the securities laws and other provisions intended to promote the technology. They will be hard to administer and even harder—or impossible—for regulators to fix when flaws are discovered. Lawyers will exploit the complexities to secure lower compliance burdens for their clients. The proposals also promote current business models which could become outdated; for example, there are new blockchains being developed that may not fit the legislative definitions.

The Republicans sponsoring these proposals seem to be fighting the last war, when Biden administration regulators resisted the technology. But this ignores the tectonic shift in regulation under the Trump administration. The SEC and CFTC are now doing what the crypto industry sought for four years, which is to develop rules and guidance.³ I may not agree with everything they do, but at least it is being done through public notice and comment procedures. The legislative process is not a superior way to do that.

Meanwhile, opponents (mostly Democrats) in Congress face a difficult challenge. They don’t like the current proposals because of the risks of regulatory arbitrage and because they believe any legislation should address the conflicts posed by the crypto business interests of President Trump and his family.⁴ But opposition to any legislation could make them vulnerable to becoming targets for another tsunami of crypto industry campaign contributions as was observed in 2024.⁵

The pros and cons of merger

Merging the SEC and CFTC has been suggested many times before, but the politics have always been challenging. The House Financial Services Committee and the Senate Banking Committee oversee the SEC, while the respective agriculture committees oversee the CFTC. That reflects the CFTC’s origins, having begun as an office within the Agriculture Department because of the importance of agricultural futures to farmers.

Having had the honor of chairing the CFTC, I apologize to my former colleagues if they feel I’ve thrown them under the bus. But a merger could be a boon for the CFTC’s historic mission of regulating the markets for derivatives on physical commodities like agricultural products, metals, and energy. Those markets are critical to the global economy and to the livelihood of farmers and many other firms up and down supply chains and may not be getting sufficient attention given the recent expansion of the CFTC’s mission into crypto and prediction markets.

A merger could reinforce the importance of those markets. We could create a vice chairman to oversee regulatory responsibilities for historic commodities just as we created a vice chairman for supervision at the Federal Reserve Board. That position could be subject to confirmation and oversight by the Congressional agricultural committees, maintaining their oversight roles and easing legislative enactment of merger. The new agency should be given a new name, like the Financial Markets Agency. This is not an acquisition, and we should instill a new, joint culture.  

Some may say that the crypto markets are not sufficiently important to justify a radical step that we have declined to take in the past. Certainly, the economic utility of the crypto markets today is insignificant compared to the securities market (and its importance to capital formation) and the commodity derivatives market (and its importance to price discovery and hedging). Much of the crypto activity to date has not been transformative but simply speculative, driven by desires to push up the price of tokens lacking in financial or economic utility. But the merger calculus changes if one believes tokenization will become significant for traditional markets.

If merger is a step we do not wish to take, there are other ways to facilitate coordinated regulation between the agencies. In 2022, Professor Howell Jackson of the Harvard Law School and I proposed a self-regulatory organization, jointly overseen by the SEC and CFTC, as a way to regulate the crypto markets without Congressional action.⁶ The foundation of that proposal was the importance of regulatory coordination. Professor Jackson and I explore some other options in an article to be published shortly that discusses the coming changes in our financial markets. At the very least, Congress should mandate joint rulemaking on classification questions and set broad principles rather than prescriptive rules.

Conclusion

Congress may end up passing legislation along the lines of the current leading Republican market structure proposal⁷ given the pressures of crypto industry lobbying and campaign contributions. But legislation that sets some general objectives and either merges the SEC and CFTC or creates the institutional means for them to work together closely would be a better solution. Democrats might turn the tables on the debate with an approach that is not only good for regulation and innovation, but good for government efficiency. And President Trump could be just the president who can get an idea whose time may have finally come across the finish line.