SEC Decision on Ether Custody Raises Concerns: CFTC Chairman

The head of the Commodity Futures Trading Commission (CFTC), Rostin Behnam, has issued a warning about a potential Securities and Exchange Commission (SEC) decision that could classify Ether (ETH) as a security. 

Behnam raised concerns about the conflict this might create with existing United States financial market rules during a March 6 hearing before the House Committee on Agriculture.

Bitcoin and Ether are Commodities: CFTC Chair

In the hearing, the CFTC Chair emphasized that both Bitcoin and Ether are commodities, stating, “Both Bitcoin and Ether are commodities,” highlighting their distinct classification under current regulations. 

However, he expressed reservations about the recent decision by SEC-registered special purpose broker-dealer (SPBD) Prometheum to offer Ether custody services.

Uncertainty Surrounding Ether

Behnam clarified that the decision made by Prometheum was an independent one and not a directive from the SEC. He voiced his belief that the decision doesn’t align with the SEC’s current perspective on Ether. The SEC, chaired by Gary Gensler, has not explicitly classified ETH as a security or a commodity, creating uncertainty in the regulatory landscape.

The potential conflict arises from the fact that SEC-registered SPBDs are authorized to custody securities, and if the SEC were to validate Prometheum’s decision, treating Ether as a security, it could lead to non-compliance with SEC rules for exchanges listing Ether as a futures contract under CFTC rules.

“The issue is if we do have any action by the SEC to essentially validate that [Prometheum’s] decision, i.e. constituting Ether as a security, it will then put our registrants, our exchanges who list Ether as a futures contract sort of in non-compliance of SEC rules as opposed to CFTC rules,” Behnam said.

Market Integrity

Behnam stressed the importance of market integrity and expressed concerns over the impact on registrants and exchanges if the SEC were to categorize Ether as a security. He emphasized that the conclusion that Ether is a commodity has been a “years-old decision” that has proven effective in maintaining market functionality.

CFTC Chair Highlights Challenges Faced

In his prepared remarks, Behnam highlighted the challenges faced by the CFTC in adapting to the evolving market and technology. Increased participation in the crypto market has tested the limits of the existing regulatory framework. 

Behnam acknowledged the absence of legislation addressing the regulatory gap in the digital commodity asset spot market and urged Congress to take action, emphasizing the necessity of addressing these gaps to ensure the continued enthusiasm for digital assets doesn’t hinder market stability.