The crypto winter has taken hold of the market, and things will only get worse before they get better. Many exchanges are flashing warning signs, and others face similar fates. In addition, a bill that would put crypto under CFTC regulations is making its way around Congress. All of this has made crypto investors nervous about their investments. So let’s look at what CFTC regulations could mean for crypto.
What are commodities futures?
Commodity futures are, in simple terms, bets on what prices will be in the future. Futures contracts are binding agreements between two parties that set a price today for a specific commodity. The expectation is that they will deliver on some date in the future. If you believe prices will rise over time, you can buy a futures contract with an expiration date further into the future at a lower price than the market value.
Puts and call options are both futures contracts, for example. The inverse is also true. If you think prices will fall, you can sell your contract at a higher rate than the market value when it expires. Futures options allow traders and investors to make money off of their predictions.
How would this affect crypto?
Regarding regulations, Bitcoin and other cryptocurrencies (known as tokens) fall under two umbrella categories: commodities and securities. The Commodity Futures Trading Commission (CFTC) is more responsible for commodity regulations, while the Securities Exchange Commission (SEC) is responsible for securities regulation. Neither agency can regulate both in one area. So whichever agency wins out in regulating cryptocurrencies first could significantly impact market prices.
CFTC and Crypto Exchanges
CFTC regulations could change how crypto exchanges operate. With various pieces of legislation floating around, there’s a lot to be considered regarding what regulatory decisions would mean for crypto in America. Exchanges risk falling under multiple regulatory bodies: SEC, CFTC, and FDIC. For example, if an exchange uses USD as its base currency and allows its customers to trade in other fiat currencies like Yen or Euros, it would most likely fall under CFTC jurisdiction.
If an exchange only allows trading between cryptos, it falls under SEC regulation. Cryptocurrencies meet all the requirements to qualify as a security. SEC Chair Gary Gensler has been vocal about wanting the agency to oversee crypto. Not to mention, he’s gone as far as expressing concern that the CFTC wouldn’t provide enough protections for investors and could undermine the market.
If they allow customers to purchase cryptos with credit cards, they fall under FDIC regulation. The FDIC offers investors protection of up to $250,000. Ethereum co-founder, Vitalik Buterin, has said should apply to people who lost money in the Terra/Luna crash.
If they offer margin trading or derivatives on their platform, they fall under CFTC regulation again. That’s because they classify these instruments as futures. Globex is an example of an exchange that allows crypto futures trading. The details of how your exchange operates determine which government body regulates them.
