Regulatory Jurisdiction in the Digital Asset Landscape: An In-Depth Analysis of SEC and CFTC Authority and Implications for Market Innovation and Compliance

Abstract

The pervasive influence and rapid evolution of digital assets, encompassing a diverse spectrum from cryptocurrencies and stablecoins to non-fungible tokens (NFTs) and decentralized finance (DeFi) protocols, have profoundly reshaped the global financial landscape. This transformative shift has simultaneously precipitated a complex and often contentious jurisdictional dispute within the United States regulatory apparatus, primarily between the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This comprehensive research report meticulously delves into the foundational historical mandates and the continuously evolving roles of these two pivotal federal agencies, critically examining the significant areas of overlap, definitional ambiguities, and direct conflict in their respective attempts to establish regulatory oversight over digital assets. It further meticulously explores the multifaceted implications of these persistent jurisdictional disputes, including their discernible impact on market innovation, the intricate challenges they impose on operational compliance for nascent and established crypto businesses alike, and the ongoing, albeit arduous, legislative efforts aimed at forging a clearer, more predictable, and coherent regulatory framework necessary for the sustainable growth of the digital asset ecosystem. The analysis underscores the urgent imperative for regulatory clarity to foster domestic innovation, safeguard investors, and preserve the United States’ competitive standing in the global digital economy.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction

The advent and meteoric rise of digital assets represent a paradigm shift, introducing unprecedented challenges to the historically established financial regulatory structures. Central to these novel challenges is the fundamental question of regulatory jurisdiction: precisely which federal agency or agencies possess the requisite authority to oversee digital assets, their issuers, and their various derivatives? The SEC and CFTC, each endowed with distinct statutory mandates originating from different eras of financial market evolution, have found themselves engaged in a protracted ‘turf war’ over this pivotal authority. This conflict stems from the inherent novelty and hybrid nature of many digital assets, which often defy easy categorization within existing legal definitions of ‘securities’ or ‘commodities’. This report aims to comprehensively dissect the historical context underpinning this dispute, illuminate its current state characterized by ‘regulation by enforcement’, and project potential future developments, providing an in-depth, nuanced analysis for all stakeholders across the burgeoning digital asset ecosystem. Understanding this regulatory impasse is not merely an academic exercise; it is crucial for investors seeking clarity, innovators navigating legal uncertainty, and policymakers striving to craft effective and future-proof legislation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Historical Mandates and Roles of the SEC and CFTC

To fully appreciate the complexities of the current jurisdictional imbroglio, it is essential to revisit the foundational mandates and evolutionary trajectories of both the SEC and the CFTC, understanding the historical contexts that shaped their powers and responsibilities.

2.1 The Securities and Exchange Commission (SEC)

Established in 1934, in the immediate aftermath of the devastating 1929 stock market crash and the ensuing Great Depression, the SEC was conceived as a direct response to widespread market abuses, rampant speculation, and significant investor losses. Its primary mandate, born from a period of profound economic distrust, is to regulate securities markets, thereby ensuring transparency, promoting fairness, and, critically, protecting investors from fraud and manipulation. The SEC’s authority is primarily grounded in two landmark pieces of legislation:

• The Securities Act of 1933: Often referred to as the ‘truth in securities’ law, this Act requires that securities offered for public sale be registered with the SEC. It mandates that investors receive financial and other significant information concerning securities being offered for public sale, and it prohibits misrepresentations, deceit, and other fraudulent acts in the sale of securities. This Act introduced the concept of the prospectus, a detailed disclosure document intended to inform potential investors.
• The Securities Exchange Act of 1934: This Act created the SEC itself and granted it broad authority over all aspects of the securities industry. It regulates secondary market trading, including exchanges, broker-dealers, transfer agents, and clearing agencies. It also empowers the SEC to define and prohibit various fraudulent activities, enforce reporting requirements for publicly traded companies, and regulate proxy solicitations and tender offers. A key provision is Section 3(a)(10), which broadly defines ‘security’ to include a wide array of financial instruments, most notably ‘investment contract’.

The SEC’s interpretation of an ‘investment contract’ has been particularly pivotal in its approach to digital assets. This interpretation derives primarily from the seminal Supreme Court case of SEC v. W.J. Howey Co. (1946). The so-called ‘Howey Test’ defines an investment contract, and thus a security, as an ‘investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others’. The four prongs of this test are:

1. Investment of Money: This prong is generally straightforward in the digital asset context, referring to the exchange of fiat currency or other digital assets for the new digital asset.
2. In a Common Enterprise: This can be either ‘horizontal’ (pooling of investors’ funds, with investors sharing pro rata in the profits and losses of the enterprise) or ‘vertical’ (the fortunes of the investor are tied to the efforts and success of the promoter, or third party).
3. With a Reasonable Expectation of Profits: This refers to the investor’s motivation to purchase the asset primarily for financial gain, rather than for consumption or use.
4. To Be Derived Solely from the Efforts of Others: This is often the most contentious prong in digital asset analysis, as it scrutinizes the extent to which the value or profitability of the asset depends on the active managerial or entrepreneurial efforts of a central team, foundation, or group of individuals. The term ‘solely’ has been interpreted broadly by courts to mean ‘predominantly’ or ‘substantially’.

The SEC’s application of the Howey Test to Initial Coin Offerings (ICOs) and other digital asset sales has been the bedrock of its enforcement actions, particularly against projects that raised capital by selling tokens to the public without registering them as securities or qualifying for an exemption. The agency maintains that many digital assets, especially at their inception, function as unregistered investment contracts, regardless of any proclaimed ‘utility’ by their issuers.

2.2 The Commodity Futures Trading Commission (CFTC)

The CFTC, created in 1974, emerged from a different regulatory lineage than the SEC. Prior to its establishment, commodity futures trading was overseen by the Commodity Exchange Authority (CEA), an agency within the U.S. Department of Agriculture, primarily focused on agricultural commodities. However, as commodity markets grew in complexity and scope to include financial instruments and other non-agricultural commodities, the need for a dedicated and independent regulator became apparent. The CFTC was thus tasked with overseeing the derivatives markets, including futures, swaps, and certain options markets. Its mission is multifaceted: to promote market integrity, protect market participants from fraud and manipulation, and foster competitive and efficient markets. The CFTC’s jurisdiction is primarily delineated by the Commodity Exchange Act (CEA).

The CEA broadly defines ‘commodity’ to include ‘wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions as provided in Public Law 85-839, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in’. This expansive ‘all other goods and articles’ clause has been instrumental in the CFTC’s assertion of jurisdiction over digital assets. Notably, the CEA also grants the CFTC authority over fraud and manipulation in the spot (cash) market for commodities, even if those commodities themselves are not subject to direct CFTC regulation for trading. This ‘anti-fraud and anti-manipulation’ authority has been a key tool for the CFTC in the digital asset space.

The CFTC’s focus is predominantly on derivatives contracts – financial instruments whose value is derived from an underlying asset, rate, or index. These include:

• Futures Contracts: Standardized agreements to buy or sell a specified quantity of a commodity or financial instrument at a determined price on a future date.
• Options Contracts: Give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a certain date.
• Swaps: Customizable agreements between two parties to exchange future cash flows or other financial instruments based on an underlying asset, rate, or index.

The CFTC views certain digital assets, such as Bitcoin and Ethereum, as analogous to traditional commodities like gold, oil, or agricultural products. This classification is primarily based on their fungibility, decentralized nature, and their use as a medium of exchange or store of value, rather than as a means to raise capital for a specific enterprise in the way an investment contract does. The agency has asserted that derivatives based on these digital assets fall squarely within its purview, and it has also exercised its anti-fraud and anti-manipulation authority in the underlying spot markets for these assets, even where the spot market itself is not directly regulated by the CFTC.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Jurisdictional Overlap and Conflict

The fundamental tension between the SEC and CFTC arises from the novel characteristics of digital assets, which often possess attributes that blur the traditional lines between securities and commodities. This ambiguity has led to significant jurisdictional overlap and persistent conflict, manifesting in differing classifications and a fragmented approach to enforcement.

3.1 Classification of Digital Assets

The core of the jurisdictional contention lies in the fundamental classification of digital assets. While the SEC insists on applying the Howey Test to determine if a digital asset constitutes an ‘investment contract’ (and thus a security), the CFTC primarily views many prominent digital assets as ‘commodities’ under the expansive definition of the CEA. This creates a spectrum of interpretations:

• The SEC’s Security Stance: The SEC consistently asserts jurisdiction over digital assets it deems to be securities. This applies particularly to tokens issued through Initial Coin Offerings (ICOs) or similar capital-raising mechanisms, where participants invest money with the expectation of profits driven by the efforts of a central team or developer. SEC Chair Gary Gensler has repeatedly emphasized that ‘most crypto tokens are securities’, arguing that they meet the Howey Test criteria. He argues that the overwhelming majority of digital assets, especially those with identifiable issuers, active development teams, or promotional efforts, fall under the SEC’s purview. Even if a token later develops utility, the SEC’s stance is that its initial offering might have been an unregistered securities offering. The concept of ‘sufficient decentralization’ has emerged as a key, albeit undefined, criterion for a token to potentially shed its security classification, as famously articulated by former SEC Director William Hinman in his 2018 speech regarding Ethereum. However, the exact threshold for ‘sufficient decentralization’ remains a significant point of ambiguity.

• The CFTC’s Commodity Stance: Conversely, the CFTC claims authority over digital assets classified as commodities. This view is most consistently applied to widely traded and decentralized digital assets like Bitcoin (BTC) and, increasingly, Ethereum (ETH). The CFTC declared Bitcoin a commodity as early as 2015, and its former Chairman, Heath Tarbert, publicly stated in 2019 that Ethereum is a commodity. The rationale often hinges on the asset’s decentralized nature, lack of a central issuer whose efforts drive profit expectations, and its primary function as a store of value or medium of exchange, akin to traditional commodities like gold or oil. The CFTC’s jurisdiction typically extends to the derivatives (futures, options, swaps) based on these underlying digital commodities, as well as possessing anti-fraud and anti-manipulation authority over their spot markets. For example, the CFTC regulated the first cash-settled Bitcoin futures contracts listed on regulated exchanges, clearly exercising its mandate.

• The ‘Hybrid’ Nature and Definitional Quandaries: Many digital assets exhibit characteristics of both or defy easy categorization, leading to what is often described as a ‘functional’ vs. ‘form’ debate. A ‘utility token’ might be marketed for its use within a specific blockchain ecosystem, but if its value is speculative and tied to the efforts of a development team, it could also be deemed an investment contract. Stablecoins, designed to maintain a stable value relative to a fiat currency, payment token, or other asset, might appear to be a currency, but depending on how they are offered, backed, or promise returns, they could also potentially be viewed as securities. Similarly, NFTs, initially perceived as unique digital collectibles, can cross into security territory if they are fractionalized, pooled, or marketed with an expectation of profits from managerial efforts. This inherent hybridity of digital assets frequently places them in a regulatory grey area, allowing both agencies to assert plausible claims to jurisdiction, often leading to conflicting signals for market participants.

3.2 Regulatory Ambiguities and Enforcement Actions

The absence of clear, harmonized regulatory guidelines has inevitably led to a ‘regulation by enforcement’ approach, where both agencies initiate actions against entities within the digital asset space, often resulting in legal challenges, market uncertainty, and a pervasive sense of regulatory whack-a-mole. This approach is highly criticized for its reactive nature, lack of predictability, and potential to stifle legitimate innovation.

• SEC Enforcement Actions: The SEC has been aggressive in pursuing actions against entities for offering unregistered securities, operating unregistered exchanges, or acting as unregistered broker-dealers or clearing agencies. Notable examples include:

  • Ripple (XRP): The SEC filed a lawsuit against Ripple Labs and two of its executives in December 2020, alleging that the sale of XRP constituted an unregistered securities offering. This case has become a landmark example of the SEC’s broad interpretation of the Howey Test and the challenges of applying it to a widely traded digital asset. While a court ruling in July 2023 indicated that programmatic sales of XRP on exchanges did not constitute an unregistered securities offering, direct sales to institutional investors were deemed securities sales, highlighting the nuanced and often unpredictable nature of the Howey analysis.
  • Coinbase: In June 2023, the SEC sued Coinbase, alleging that the cryptocurrency exchange was operating as an unregistered national securities exchange, broker, and clearing agency, and offering unregistered securities through its staking program. Coinbase has vigorously contested these allegations, including filing a mandamus petition seeking clear rulemaking from the SEC, underscoring the industry’s desire for forward-looking guidance rather than retrospective enforcement.
  • Terraform Labs (Do Kwon): The SEC charged Terraform Labs and its founder Do Kwon with orchestrating a multi-billion dollar crypto asset securities fraud involving unregistered crypto asset securities, including the TerraUSD stablecoin and Luna token, which collapsed spectacularly in 2022.
  • Binance: The SEC sued Binance and its CEO Changpeng Zhao in June 2023, alleging the unregistered offer and sale of securities, the operation of unregistered exchanges, broker-dealers, and clearing agencies, and a variety of deceptive practices.

• CFTC Enforcement Actions: The CFTC has focused its enforcement efforts on cases involving fraud, market manipulation, and the operation of unregistered derivatives platforms in the digital asset space. Key instances include:

  • BitMEX: In 2020, the CFTC (and the Department of Justice) brought charges against BitMEX, a derivatives trading platform, for operating an unregistered trading platform and violating anti-money laundering (AML) regulations. This case exemplified the CFTC’s jurisdiction over derivatives based on digital assets.
  • Ooki DAO: In 2022, the CFTC took enforcement action against Ooki DAO, a decentralized autonomous organization, for offering illegal, unregistered retail commodity futures transactions and violating AML laws. This was a groundbreaking action, marking the first time a U.S. regulator pursued charges against a DAO itself, raising complex questions about accountability and decentralized governance.
  • Binance: In March 2023, the CFTC filed a lawsuit against Binance and its founder, alleging that they knowingly offered unregistered crypto derivatives products in the U.S. and operated an illegal unregistered exchange, violating key provisions of the CEA, including ignoring AML and KYC requirements.

These overlapping enforcement efforts have created a fragmented regulatory environment, compelling crypto businesses to navigate a labyrinth of potentially conflicting requirements and interpretations. Companies might find themselves subject to scrutiny from both agencies for different aspects of their operations or even for the same asset viewed through different regulatory lenses. This dual threat significantly complicates compliance, increases legal risk, and fosters a climate of uncertainty, driving many entities to seek clarity through expensive litigation rather than constructive regulatory engagement.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Implications for Market Innovation

The profound regulatory uncertainty stemming from the prolonged jurisdictional disputes between the SEC and CFTC has significant and often detrimental implications for innovation within the burgeoning digital asset sector. While regulators aim to protect investors and maintain market integrity, the current environment inadvertently stifles the very innovation that could propel the U.S. economy forward.

4.1 Stifling Innovation

The lack of clear, predictable regulatory guidelines creates a chilling effect on innovation. Entrepreneurs, developers, and blockchain engineers, often driven by a desire to create novel financial products and decentralized applications, may be deterred from launching new projects in the United States due to the omnipresent fears of unforeseen regulatory repercussions. This phenomenon manifests in several critical ways:

• Reduced Product Development and Launch: Startups are hesitant to build and deploy new protocols or digital assets if they cannot ascertain whether their creations will be deemed illegal unregistered securities or fall under ambiguous commodity regulations. The risk of retrospective enforcement, where a project launched with good intentions could later face crippling fines and legal battles, is a powerful disincentive. This leads to a slowdown in the development and market introduction of potentially groundbreaking technological advancements and new financial products that could enhance efficiency, reduce costs, and broaden financial inclusion.

• Increased Legal and Compliance Overhead: Instead of focusing resources on research, development, and user acquisition, companies are compelled to dedicate substantial capital and personnel to legal consultations, lobbying efforts, and the implementation of robust, often speculative, compliance programs. This diversion of resources from core business activities directly impedes innovation. For many startups, these legal costs can be prohibitive, acting as an insurmountable barrier to entry.

• Discouragement of Institutional Participation: Traditional financial institutions, which typically operate under strict regulatory frameworks, are extremely wary of engaging deeply with digital assets given the current U.S. regulatory ambiguity. Banks, asset managers, and institutional investors are reluctant to offer crypto-related services, custody digital assets, or invest significantly in blockchain projects without clear guidance on permissible activities and the associated liabilities. This limits the flow of institutional capital and expertise into the sector, preventing it from reaching its full potential and integrating more seamlessly into the broader financial system.

• Brain Drain and Talent Flight: The regulatory quagmire can lead to a ‘brain drain’ of talent from the United States. Visionary entrepreneurs, skilled developers, and innovative researchers in the digital asset space may choose to establish their companies or pursue their careers in jurisdictions with more favorable, predictable, and welcoming regulatory environments. This loss of intellectual capital and entrepreneurial drive undermines the competitiveness of the U.S. digital asset market on the global stage, impacting future job creation and economic growth.

4.2 Capital Flight

Beyond stifling domestic innovation, unclear regulatory frameworks can directly result in significant capital flight, as businesses, investors, and even established crypto companies actively seek jurisdictions that offer greater regulatory certainty and more predictable operating environments. This trend poses a severe threat to the United States’ long-term competitiveness in the rapidly expanding digital asset economy.

• Relocation of Businesses: Numerous digital asset firms, frustrated by the lack of clarity and the threat of enforcement actions, have already either considered or actively pursued relocating their operations, or parts thereof, to countries perceived as more crypto-friendly. Jurisdictions such as the United Arab Emirates (Dubai, Abu Dhabi), Singapore, Switzerland, Bermuda, and parts of the European Union (especially with the advent of the Markets in Crypto-Assets, MiCA, regulation) have actively worked to establish comprehensive and clear regulatory frameworks. These jurisdictions often provide specific licensing regimes for digital asset service providers, clear tax guidance, and a proactive approach to engaging with the industry, in stark contrast to the U.S. approach of ‘regulation by enforcement’.

• Diversion of Investment Capital: Venture capitalists and institutional investors, who are typically risk-averse regarding regulatory uncertainty, may choose to direct their capital towards digital asset projects based in jurisdictions with established regulatory clarity. This means less funding for U.S.-based crypto startups, making it harder for them to scale, innovate, and compete globally. Foreign investors may also become hesitant to invest in U.S. digital asset companies or markets due to the perceived legal and regulatory risks.

• Loss of Market Leadership: Historically, the United States has been a global leader in financial innovation. However, the current regulatory environment risks ceding this leadership in the digital asset space to other nations. If innovative projects and significant capital move offshore, the U.S. stands to lose out on job creation, tax revenues, and the strategic advantages that come with being at the forefront of a transformative technology. This could have long-term geopolitical and economic implications, diminishing the U.S.’s influence over global standards and the evolution of financial technology.

The collective impact of stifled innovation and capital flight is a diminished competitive posture for the U.S. in the digital asset landscape. It creates a vacuum that other nations are eager to fill, potentially marginalizing the U.S. and its ability to shape the future of this critical technological and financial sector.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Operational Compliance Challenges

The ongoing regulatory ambiguity and the dual jurisdictional claims of the SEC and CFTC impose significant and often unique operational compliance challenges on businesses operating within the digital asset ecosystem. Companies are forced to navigate a complex and evolving landscape, leading to increased costs and heightened risks.

5.1 Regulatory Compliance Costs

The uncertainty surrounding which regulatory body has primary jurisdiction over a particular digital asset or business activity necessitates a heightened degree of caution and often redundant compliance efforts, which translate directly into substantial financial and operational costs for crypto businesses:

• Extensive Legal Consultations: Companies are compelled to engage in frequent and exhaustive legal consultations with specialized attorneys to interpret existing laws, analyze novel digital assets against the Howey Test or CEA definitions, and assess potential enforcement risks. This ongoing legal advice is not a one-time expense but a continuous cost, as the regulatory landscape remains fluid and new digital asset forms emerge. Each product, service, and even marketing claim must be meticulously vetted for compliance with both securities and commodities laws, alongside general consumer protection statutes.

• Robust and Redundant Compliance Programs: To mitigate risks from both agencies, businesses often implement robust, and at times overlapping, compliance programs. This includes establishing sophisticated Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols, which are generally required by FinCEN (Financial Crimes Enforcement Network) but are also subject to scrutiny by both the SEC and CFTC if an entity falls under their respective purviews. Additionally, companies must develop bespoke compliance frameworks for areas such as:

  • Asset Listing and Delisting: Platforms must conduct extensive legal analyses for each digital asset they wish to list, determining if it could be classified as a security or a commodity, and then applying appropriate internal controls and disclosures. The risk of listing an ‘unregistered security’ is particularly high.
  • Market Surveillance: Implementing sophisticated market surveillance systems to detect and prevent fraud, manipulation, and insider trading is crucial. However, the specific regulatory expectations for such systems can vary depending on whether an asset is viewed as a security or a commodity, and whether the platform is operating a spot market, a derivatives market, or both.
  • Disclosure Requirements: Companies may face conflicting or unclear disclosure requirements. If an asset is a security, extensive registration statements and ongoing reporting obligations (e.g., Form 10-K, 10-Q) might apply. If it’s a commodity derivative, different types of disclosures and risk warnings may be mandated by the CFTC.
  • Broker-Dealer/Exchange/Clearing Agency Registrations: Depending on their activities, firms might theoretically need to register as a broker-dealer, exchange, or clearing agency with the SEC, or as a Designated Contract Market (DCM), Swap Execution Facility (SEF), or Futures Commission Merchant (FCM) with the CFTC. The regulatory path for hybrid models or novel digital asset platforms remains largely undefined, leading to significant uncertainty and potential non-compliance by omission or lack of a clear path to registration.

• Litigation and Settlement Costs: In the absence of clear rules, enforcement actions become inevitable. Defending against a lawsuit from either the SEC or CFTC is exorbitantly expensive, involving discovery, expert witnesses, court appearances, and potentially multi-year legal battles. Even if a company prevails, the legal fees can be crippling. Settlements, while avoiding prolonged litigation, often involve substantial financial penalties and commitments to expensive, ongoing compliance monitorships. These costs can divert critical resources, especially from nascent startups, making sustainable growth challenging or impossible.

5.2 Risk Management

The lack of clear regulatory guidelines profoundly complicates risk management strategies for digital asset firms. Uncertainty regarding regulatory expectations translates directly into heightened and unquantifiable risks, leading to inconsistent compliance practices and increased exposure to legal, financial, and reputational harms:

• Legal and Litigation Risk: This is the most immediate and tangible risk. Firms face the constant threat of being targeted by enforcement actions for alleged violations of securities or commodities laws, even if they have made good-faith efforts to comply with existing (and often ambiguous) guidance. The outcomes of such actions are often unpredictable, as evidenced by the varying judicial interpretations in different crypto-related lawsuits.

• Reputational Risk: An enforcement action, even if eventually resolved favorably, can severely damage a company’s reputation, eroding trust among investors, partners, and customers. This can lead to loss of business, difficulty in raising capital, and challenges in attracting and retaining talent.

• Operational Risk: The need to navigate multiple, potentially conflicting regulatory regimes can lead to operational inefficiencies and errors. Companies might inadvertently fail to implement necessary controls or misinterpret regulatory requirements, leading to operational lapses that could trigger enforcement action.

• Market Risk: Regulatory uncertainty itself can introduce market risk. Announcements of new enforcement actions or conflicting statements from regulators can cause significant volatility in the prices of specific digital assets or the broader crypto market. Businesses whose revenues are tied to these assets face increased financial exposure due to these exogenous shocks.

• Product Development and Market Entry Risk: Firms must continually assess the regulatory risk of developing and launching new digital assets or services. This can lead to risk aversion, where companies opt not to pursue innovative ideas that might offer significant value but carry high regulatory uncertainty. Similarly, entering new markets or expanding existing services becomes fraught with peril without a clear understanding of the applicable rules.

In essence, the fragmented regulatory environment forces digital asset firms into a reactive posture, constantly adapting to enforcement precedents rather than operating within a well-defined and predictable framework. This reactive stance leads to higher operating costs, increased risk exposure, and ultimately, hinders the industry’s maturation and its ability to attract mainstream financial participants.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Legislative Efforts and the Push for Clarity

Recognizing the pervasive regulatory ambiguity and its detrimental effects on the U.S. digital asset ecosystem, legislative efforts have gained momentum, aiming to delineate the roles of the SEC and CFTC and establish a more coherent framework. These efforts underscore a growing bipartisan consensus on the urgent need for clarity, though their path through Congress remains challenging.

6.1 The Financial Innovation and Technology for the 21st Century Act (FIT21)

One of the most significant and comprehensive legislative proposals to date is the Financial Innovation and Technology for the 21st Century Act (FIT21), which passed the U.S. House of Representatives in May 2024 with significant bipartisan support. Introduced in 2023, FIT21 represents a concerted effort to provide a clear statutory framework for digital asset regulation by definitively assigning regulatory authority over digital assets based on their classification as either securities or commodities.

Key Provisions and Mechanisms of FIT21:

• Definitional Clarity: The Act proposes to amend both the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as the Commodity Exchange Act (CEA), to specifically define ‘digital asset,’ ‘blockchain system,’ ‘digital asset commodity,’ ‘payment stablecoin,’ and other critical terms. This statutory definition aims to resolve ambiguities that currently plague regulatory interpretation.

• The ‘Decentralization Test’ for Commodity Status: Central to FIT21 is the establishment of a ‘decentralization test’ to determine whether a digital asset should be regulated as a commodity by the CFTC rather than a security by the SEC. A digital asset would be presumed to be a digital asset commodity if its blockchain system is ‘functional and decentralized’. The Act proposes specific criteria for decentralization, which typically include:

  • No person having unilateral control over the network.
  • No single person or group owning 20% or more of the digital asset.
  • No single person or group owning 20% or more of the voting power.
  • A significant number of unaffiliated active participants.
  • The issuer and its affiliates do not have unilateral authority to control the functions or operations of the blockchain system.
  • The issuer and its affiliates do not market the digital asset in a way that suggests profits from their efforts.

• Notice of Intent and Disclosure Requirements: The bill introduces a mechanism for digital asset developers to file a ‘Notice of Intent’ with the SEC if they intend for their blockchain system to become decentralized. This provides a pathway for projects to potentially transition from being deemed a security to a commodity once they achieve sufficient decentralization. During the period before full decentralization, stricter disclosure requirements, similar to those for securities, would apply.

• Clear Jurisdictional Delineation: FIT21 explicitly grants the CFTC primary regulatory authority over ‘digital asset commodities’ and markets for their non-retail spot transactions. The SEC would retain authority over digital assets that continue to meet the definition of a security, as well as those that are offered or sold as part of an investment contract. The bill also clarifies roles for payment stablecoins, generally placing them under a state-level regulatory framework, with some federal oversight.

• Regulation of Digital Asset Marketplaces: The Act creates new registration categories for ‘digital asset trading systems’, ‘digital asset brokers’, and ‘digital asset dealers’, requiring them to register with either the SEC or CFTC, depending on the types of assets they list and the nature of their activities. It aims to streamline registration processes and create a unified set of rules for these entities, potentially reducing the burden of dual registration.

• Consumer Protection and Market Integrity: Beyond jurisdictional clarity, FIT21 includes provisions aimed at enhancing consumer protection, such as requiring disclosures regarding asset risks, ensuring segregation of customer funds, and establishing mechanisms to prevent market manipulation.

Other Notable Legislative Efforts:

While FIT21 is currently the most prominent bill, other legislative proposals have contributed to the discussion, notably the ‘Responsible Financial Innovation Act’ (often referred to as the Lummis-Gillibrand Bill), introduced by Senators Cynthia Lummis and Kirsten Gillibrand. This bipartisan bill also sought to classify digital assets based on their functions (ancillary assets vs. commodities vs. securities), establish comprehensive regulatory frameworks for stablecoins, and grant clearer authority to the CFTC over the spot market for digital commodities. While not progressing as far as FIT21, it laid important groundwork and demonstrated growing bipartisan recognition of the problem.

These legislative efforts signify a maturation in the U.S. approach to digital assets, moving away from purely reactive enforcement towards a proactive statutory framework.

6.2 Challenges and Prospects

Despite the significant bipartisan support for FIT21 in the House, the path to enactment remains fraught with challenges. The legislative process is inherently complex, and digital asset regulation touches upon deeply held beliefs about financial markets, technological innovation, and regulatory philosophy.

Key Challenges:

• Senate Passage: While FIT21 passed the House, its prospects in the Senate are less certain. Senators may have different priorities, and various committees (e.g., Banking, Agriculture, Finance) may seek to assert their own influence, potentially leading to further amendments or a stall.

• Inter-Agency Friction and Opposition: The SEC, under Chair Gary Gensler, has voiced strong opposition to certain aspects of FIT21, particularly the bill’s delineation of jurisdiction. Gensler has consistently argued that existing securities laws are sufficient to regulate the crypto market and that additional legislation could create regulatory gaps or weaken investor protections. He has expressed concerns that FIT21 might inadvertently create a pathway for digital asset firms to avoid robust securities oversight. Conversely, CFTC Chair Rostin Behnam has publicly stated the CFTC’s need for greater clarity and authority, particularly over the spot digital commodity market, aligning more closely with the intent of bills like FIT21.

• Political Disagreements and Lobbying: Digital asset regulation remains a politically charged issue. Differences in ideological approaches to market regulation, the perceived risks of digital assets, and the influence of various lobbying groups (e.g., traditional finance vs. crypto industry, consumer protection advocates) can create legislative impasses. The political calendar, especially in an election year, can also impact the feasibility of passing complex legislation.

• Complexity of the Technology: Crafting legislation that is both comprehensive and future-proof for a rapidly evolving technology like digital assets is inherently difficult. Definitions or frameworks established today could become quickly outdated by new technological advancements or business models (e.g., new forms of DeFi, zero-knowledge proofs, or quantum computing’s impact on cryptography).

• Adequacy of Proposed Frameworks: Critics of FIT21 and similar bills argue that while they provide clarity, they might not go far enough in protecting retail investors or addressing systemic risks, or that the decentralization test might be gamed by issuers. Ensuring robust investor protection while fostering innovation remains a delicate balancing act.

Prospects for Clarity:

Despite these challenges, the momentum for legislative clarity is undeniable. The increasing size of the digital asset market, the growing number of enforcement actions, and the explicit calls from industry participants for clear rules are putting sustained pressure on Congress. The following factors may contribute to future success:

• Bipartisan Support: The bipartisan nature of FIT21’s passage in the House suggests a growing understanding across the political spectrum that the status quo is untenable.
• Industry Pressure: The digital asset industry continues to lobby intensely for clear rules, emphasizing the economic benefits of fostering innovation domestically.
• International Competition: The U.S. risks falling behind other jurisdictions that have already implemented comprehensive regulatory frameworks (e.g., MiCA in the EU). This competitive pressure could spur legislative action.
• Judicial Precedent: Ongoing litigation (e.g., the SEC v. Coinbase case, the Ripple case) will continue to shape regulatory interpretation in the absence of legislation. However, court rulings often provide asset-specific or fact-specific clarity, not the broad, forward-looking framework that legislation can offer.

The outcome of these legislative efforts will profoundly influence the future trajectory of digital asset regulation in the United States. Success will depend on effective collaboration among regulatory bodies, legislators, and industry stakeholders, demonstrating a willingness to compromise and prioritize the long-term health and competitiveness of the U.S. financial system in the digital age.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Conclusion

The jurisdictional disputes between the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over the burgeoning domain of digital assets unequivocally underscore an urgent and critical need for a coherent, unified, and comprehensive regulatory approach in the United States. The current environment, characterized by ambiguous definitions, overlapping claims, and a reliance on ‘regulation by enforcement’, has created significant headwinds for market innovation, imposed onerous compliance burdens on legitimate businesses, and threatened the nation’s competitive standing in the rapidly evolving global digital economy.

As this report has meticulously detailed, both the SEC and the CFTC operate under distinct statutory mandates, each rooted in different historical eras of financial market regulation. The SEC, armed with the broad definition of ‘investment contract’ from the Howey Test, asserts jurisdiction over digital assets it deems to be securities, particularly those offered for capital-raising purposes. Conversely, the CFTC, leveraging the expansive definition of ‘commodity’ under the CEA and its authority over derivatives markets, claims oversight for assets like Bitcoin and Ethereum, which it views as decentralized commodities. This fundamental disagreement over classification lies at the heart of the regulatory impasse, leading to costly litigation, regulatory uncertainty, and a deterrent effect on domestic investment and entrepreneurial activity.

Clear delineation of regulatory authority is not merely a bureaucratic exercise; it is an existential imperative for the digital asset industry. Such clarity is essential to promote responsible market innovation by providing entrepreneurs with predictable rules of engagement, thereby fostering an environment where technological advancements can flourish rather than being stifled by fear of unforeseen legal consequences. It is equally crucial for ensuring operational compliance, allowing crypto businesses to allocate resources efficiently towards growth and product development rather than being mired in excessive legal fees and redundant regulatory adherence. Most importantly, a well-defined framework is paramount to maintaining the United States’ position as a global leader in financial innovation and technology, ensuring that capital and talent remain within its borders rather than migrating to more hospitable jurisdictions.

Ongoing legislative efforts, most notably the Financial Innovation and Technology for the 21st Century Act (FIT21), represent a critical and commendable step toward achieving this much-needed clarity. By proposing statutory definitions, a clear decentralization test, and streamlined registration pathways, FIT21 aims to bring structure to the fragmented regulatory landscape. However, its ultimate success and broader implementation will depend on overcoming persistent political disagreements, managing inter-agency friction, and fostering effective collaboration among policymakers, regulatory bodies, and industry stakeholders. The future of digital asset innovation and the robustness of investor protection in the U.S. hinge on the ability of these diverse parties to forge a unified vision and enact a durable, forward-looking regulatory framework that balances innovation with integrity.

Many thanks to our sponsor Panxora who helped us prepare this research report.

References

• Axios. (2023, June 6). CFTC chair cites lack of clarity in need for new digital assets bill. Axios. Retrieved from (axios.com)
• Commodity Futures Trading Commission. (n.d.). Commodity Futures Trading Commission. Retrieved from (en.wikipedia.org)
• Digital Finance News. (n.d.). Jurisdictional Clarity in Digital Asset Regulation: An In-Depth Analysis of the CLARITY Act and Its Implications. Digital Finance News. Retrieved from (digitalfinancenews.com)
• Financial Innovation and Technology for the 21st Century Act. (n.d.). Financial Innovation and Technology for the 21st Century Act. Retrieved from (en.wikipedia.org)
• Guseva, Y., & Hutton, I. (2023). Regulatory Fragmentation: Investor Reaction to SEC and CFTC Enforcement in Crypto Markets. Boston College Law Review, 64(7), 1555-1613. Retrieved from (bclawreview.bc.edu)
• Isaac, C. L., Riemer, K. E., & Mikhael, C. (2022). CFTC and SEC Perspectives on Cryptocurrency and Digital Assets – Volume I: A Jurisdictional Overview. K&L Gates. Retrieved from (klgates.com)
• Merkle Science. (n.d.). CFTC vs. SEC: Navigating Regulatory Overlap in the Crypto Market. Merkle Science. Retrieved from (merklescience.com)
• Reuters. (2024, September 23). US SEC, Coinbase clash in court over crypto rulemaking. Reuters. Retrieved from (reuters.com)
• Reuters. (2025, January 10). Crypto litigation brought against the SEC and the implications of a new administration. Reuters. Retrieved from (reuters.com)
• Reuters. (2025, April 25). New US SEC chair says crypto sector deserves clear regulations. Reuters. Retrieved from (reuters.com)
• Stoller, K., Nathanson, J., & Laguardia, D. (2023). SEC and CFTC Crypto Enforcement Highlight Securities and Litigation Issues. Shearman & Sterling. Retrieved from (fintechperspectives.shearman.com)
• Time. (2021, May 20). Crypto Goes to Washington. Time. Retrieved from (time.com)
• Time. (2023, June 6). A New Congressional Bill Aims To Spur Crypto’s Growth. Time. Retrieved from (time.com)
• Willkie Compliance Concourse. (2023). CFTC Alleges Manipulative Trading on a Decentralized Digital Asset Platform. Willkie Compliance Concourse. Retrieved from (complianceconcourse.willkie.com)