Clarifying Jurisdictional Boundaries: The SEC, CFTC, and the Regulation of Digital Assets

December 29, 2025 Research Reports 0

The Intricate Dance of Jurisdiction: SEC, CFTC, and the Digital Asset Conundrum

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

Abstract

The explosive growth and diversification of digital assets have introduced unprecedented regulatory complexities, particularly in navigating the jurisdictional boundaries between the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This detailed research report comprehensively examines the historical underpinnings of these jurisdictional ambiguities, dissecting the traditional mandates of each agency, and critically evaluating the SEC’s application of the ‘Howey Test’ to classify digital assets. Through an analysis of pivotal enforcement actions brought by both the SEC and CFTC, the report illuminates the tangible impacts of regulatory uncertainty on market innovation, investor confidence, and overall market stability. Furthermore, it delves into significant legislative initiatives, most notably the Responsible Financial Innovation Act (RFIA) and the Financial Innovation and Technology for the 21st Century Act (FIT21 Act), assessing their potential to forge a clearer, more predictable regulatory landscape for the evolving digital asset ecosystem. The objective is to provide an in-depth understanding of the challenges and proposed solutions in this critical regulatory domain, underscoring the necessity for a cohesive and adaptable framework.

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

1. Introduction

The emergence of digital assets, fundamentally underpinned by distributed ledger technology (DLT) such as blockchain, represents a paradigm shift in financial markets. These novel instruments, ranging from cryptocurrencies to non-fungible tokens (NFTs) and various forms of stablecoins, defy easy categorization within pre-existing regulatory frameworks designed for traditional financial products. This inherent novelty has created significant friction with established regulatory bodies, primarily the SEC and the CFTC, whose mandates and operational methodologies were conceived in an era devoid of such technological innovations. The central conundrum revolves around determining which federal agency possesses the requisite authority to oversee specific digital asset activities, a question that has remained largely unanswered through definitive statutory guidance.

This jurisdictional ambiguity has not merely been a theoretical debate; it has translated into concrete challenges for innovators, investors, and market operators. The lack of a unified and predictable regulatory approach has fostered an environment of uncertainty, where digital asset projects frequently operate under the looming threat of retrospective enforcement actions. Such an environment has been widely criticized for potentially stifling innovation, deterring legitimate capital formation, and creating an uneven playing field for market participants. The global nature of digital assets further complicates matters, as different national jurisdictions adopt varied regulatory postures, leading to potential regulatory arbitrage and fragmentation across international markets. This report aims to dissect these intricate layers, offering a comprehensive analysis of the historical context, current challenges, and potential legislative pathways to a more coherent regulatory future for digital assets in the United States.

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

2. Historical Context of Jurisdictional Disputes

The jurisdictional boundaries between the SEC and the CFTC were, for decades, relatively clear and uncontested. The SEC, born from the legislative response to the Great Depression, was tasked with safeguarding investors, promoting market integrity, and facilitating capital formation within the securities markets. Its purview extended to stocks, bonds, mutual funds, and other investment contracts. Conversely, the CFTC, evolving from regulatory efforts concerning agricultural futures markets, was mandated to ensure the integrity and stability of U.S. derivatives markets, encompassing futures, options, and swaps on a wide array of underlying commodities, from grains to energy and financial instruments.

However, the advent of digital assets, beginning with Bitcoin in 2009, began to challenge this established order. Early in the digital asset era, the CFTC was among the first federal agencies to officially recognize Bitcoin. In a 2015 order against Coinflip, Inc. and its CEO, Francisco Riordan, for operating an unregistered Bitcoin options exchange, the CFTC explicitly stated, ‘Bitcoin and other virtual currencies are properly defined as commodities.’ This declaration set a precedent for the CFTC’s assertion of jurisdiction over certain digital assets, particularly those resembling a decentralized commodity without an identifiable issuer or ongoing managerial efforts. Their focus primarily lay in preventing fraud and manipulation in commodity spot markets and regulating derivatives based on these digital commodities.

The SEC’s engagement with digital assets became more pronounced during the Initial Coin Offering (ICO) boom of 2017. Faced with numerous projects raising capital by issuing new digital tokens, the SEC adopted the stance that many of these offerings constituted unregistered securities offerings. A seminal moment was the 2017 ‘DAO Report,’ which concluded that tokens offered in The DAO event were securities under federal law, necessitating registration or an exemption. This report marked the SEC’s firm assertion of jurisdiction over a significant portion of the digital asset market, relying heavily on the application of the ‘Howey Test’ to determine whether a digital asset qualifies as an ‘investment contract’ and thus a security. SEC Chair Gary Gensler, both as a professor at MIT and later as Chair, has consistently articulated a broad interpretation, suggesting that ‘almost all’ digital assets, with perhaps the exception of Bitcoin, should be considered securities due to their reliance on the continuing efforts of a centralized group to enhance their value.

This bifurcated approach, where the CFTC views certain digital assets as commodities and the SEC views many others (and sometimes the same ones in different contexts) as securities, has inevitably led to significant jurisdictional overlap and conflict. The lack of a clear legislative mandate defining digital assets and allocating specific oversight responsibilities has exacerbated this ‘turf war,’ creating a regulatory void and prompting urgent calls for statutory clarity to delineate precise boundaries between the two powerful agencies.

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

3. Traditional Mandates of the SEC and CFTC

To fully appreciate the complexities of the current jurisdictional disputes, it is crucial to understand the foundational mandates, historical contexts, and operational philosophies that govern the SEC and the CFTC. These agencies, while both operating within the financial regulatory ecosystem, were established with distinct purposes and statutory authorities.

3.1 The Securities and Exchange Commission (SEC)

The SEC was established by the Securities Exchange Act of 1934, following the devastating stock market crash of 1929 and the ensuing Great Depression. Its primary mission is threefold: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This mission is rooted in the belief that transparent and honest markets are essential for public confidence and economic growth.

Key Functions and Regulatory Scope:

  • Investor Protection: The cornerstone of the SEC’s mandate. This is achieved primarily through disclosure requirements. Companies offering securities to the public must register with the SEC and provide prospective investors with material information about their business, financial condition, and the securities being offered. This information, typically contained in prospectuses and periodic reports (e.g., 10-K, 10-Q), aims to enable investors to make informed decisions. The SEC also has broad anti-fraud authority, prohibiting misrepresentations and manipulative practices in securities markets.
  • Market Integrity: The SEC regulates securities exchanges (like the NYSE and Nasdaq), broker-dealers, investment advisers, and mutual funds. It sets rules designed to ensure that these entities operate fairly and transparently, preventing insider trading, market manipulation, and other abusive practices that erode public trust. It oversees self-regulatory organizations (SROs) such as FINRA, which have their own rules and enforcement mechanisms under SEC supervision.
  • Capital Formation: By fostering transparent and trustworthy markets, the SEC aims to reduce the cost of capital for businesses, encouraging investment and economic growth. While investor protection is paramount, the SEC also balances this with the need to avoid overly burdensome regulations that might hinder legitimate capital-raising efforts.

Statutory Framework: The SEC’s authority derives from several foundational laws, including the Securities Act of 1933 (governing the initial public offering of securities), the Securities Exchange Act of 1934 (governing the trading of securities in secondary markets, exchanges, and broker-dealers), the Investment Company Act of 1940 (regulating investment companies like mutual funds), and the Investment Advisers Act of 1940 (regulating investment advisers).

Enforcement Powers: The SEC possesses robust enforcement powers, including the ability to issue cease-and-desist orders, impose civil monetary penalties, order disgorgement of ill-gotten gains, and seek injunctions against individuals and entities violating securities laws. It can also refer criminal cases to the Department of Justice.

3.2 The Commodity Futures Trading Commission (CFTC)

The CFTC was established in 1974 by Congress as an independent agency to regulate the U.S. commodity futures and options markets. Its roots trace back to the Grain Futures Act of 1922 and the Commodity Exchange Act (CEA) of 1936, initially designed to protect farmers and consumers from price manipulation in agricultural commodity markets. Over time, its mandate expanded significantly to cover a vast array of commodity derivatives.

Key Functions and Regulatory Scope:

  • Market Oversight and Integrity: The CFTC’s primary responsibility is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets. This includes regulating Designated Contract Markets (DCMs, i.e., futures exchanges), Swap Execution Facilities (SEFs), and various intermediaries. It sets rules for transparent trading, orderly liquidation, and robust risk management practices within these markets.
  • Consumer and Market Participant Protection: Similar to the SEC, the CFTC aims to protect market participants from fraud, manipulation, and abusive practices within the commodity and derivatives markets. This includes preventing manipulative trading schemes, illicit solicitations, and fraudulent representations related to commodity interests.
  • Financial Soundness: The CFTC works to ensure the financial soundness of regulated entities and markets, particularly through oversight of clearing organizations, which play a critical role in mitigating systemic risk in derivatives. It also monitors for potential systemic risks posed by significant market participants.
  • Scope of ‘Commodity’: The CEA broadly defines ‘commodity’ to include ‘wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, 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 definition has been crucial in the CFTC’s assertion of jurisdiction over digital assets like Bitcoin.

Statutory Framework: The CFTC’s authority is primarily derived from the Commodity Exchange Act (CEA), which has been amended numerous times, notably by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which expanded its oversight to the previously unregulated swaps markets.

Enforcement Powers: The CFTC can bring enforcement actions seeking civil monetary penalties, disgorgement of ill-gotten gains, trading bans, and cease-and-desist orders against individuals and entities that violate the CEA and its regulations. It also cooperates with other federal and state agencies, including the Department of Justice, on criminal investigations.

While both agencies are tasked with ensuring market integrity and protecting participants, their historical focus, the types of instruments they regulate, and the statutory definitions they operate under are fundamentally different. This divergence is the root cause of the modern jurisdictional challenge posed by digital assets, which frequently exhibit characteristics that could potentially fit within either regulatory paradigm.

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

4. The ‘Howey Test’ and Its Application by the SEC

The ‘Howey Test’ is the foundational legal framework employed by the SEC to determine whether an asset or transaction constitutes an ‘investment contract’ and, by extension, a ‘security’ under U.S. federal securities laws. Its pervasive application to digital assets has been a primary driver of the regulatory ambiguity and enforcement actions observed in the nascent crypto market. A deep understanding of its origin, elements, and the nuances of its application is essential.

4.1 Origin and Context of SEC v. W.J. Howey Co.

The Howey Test originates from the landmark Supreme Court case SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The case involved the W.J. Howey Company, which owned large tracts of citrus groves in Florida. To finance its operations, Howey offered land sales contracts for portions of the groves, coupled with an optional service contract to cultivate, harvest, and market the citrus. Crucially, most purchasers were not farmers and had no interest in farming the land themselves; they were passive investors attracted by the promise of profits generated by Howey’s agricultural expertise. The SEC alleged that these combined land and service contracts constituted an unregistered offering of securities.

The Supreme Court, in its decision, acknowledged that the term ‘security’ in the Securities Act of 1933 was broad and flexible, designed to capture diverse schemes that involve investments for profit. The Court formulated a four-pronged test to identify an ‘investment contract,’ which would then fall under the definition of a security:

  1. An investment of money
  2. In a common enterprise
  3. With an expectation of profits
  4. Solely from the efforts of others

The Supreme Court ultimately ruled that the Howey Company’s offering did indeed constitute an investment contract, thereby subjecting it to federal securities laws. The ruling established a functional approach to defining securities, emphasizing the economic reality of the transaction rather than its mere form.

4.2 Detailed Breakdown of the Howey Test Elements

4.2.1 An Investment of Money

This element generally requires the investor to commit valuable assets to the enterprise. While the term ‘money’ suggests traditional fiat currency, courts have interpreted this broadly to include any valuable contribution, such as goods, services, or even other digital assets. For instance, exchanging Bitcoin or Ethereum for a new token in an ICO would typically satisfy this element, as would providing labor or intellectual property in exchange for a stake in a project with an expectation of profit.

4.2.2 In a Common Enterprise

This element signifies a pooling of interests among investors, where the fortunes of each investor are linked. Courts have adopted various interpretations, often focusing on two main types:

  • Horizontal Commonality: This is the more widely accepted and straightforward interpretation. It exists when there is a pooling of investor funds, and those investors share pro-rata in the profits and losses of the enterprise. The success or failure of all investors is interdependent.
  • Vertical Commonality: This is a more expansive view, sometimes adopted by courts. It can be further divided into ‘broad vertical commonality’ (investor success is dependent on the promoter’s expertise) and ‘strict vertical commonality’ (direct correlation between the promoter’s efforts and the investor’s profit/loss). The SEC generally favors horizontal commonality in its enforcement actions against digital assets, often pointing to the pooling of funds in an ICO for the development of a blockchain network or dApp.

For digital assets, the ‘common enterprise’ often arises from the pooling of funds during a token sale, where participants contribute capital with the shared goal of seeing the underlying network or project succeed and the token’s value appreciate.

4.2.3 With an Expectation of Profits

This element requires investors to anticipate financial returns from their investment. The expectation must be derived from the entrepreneurial or managerial efforts of others, rather than from passive appreciation of a consumable or collectible asset, or from personal use. The Supreme Court in United Housing Foundation, Inc. v. Forman (1975) clarified that the test looks for ‘an expectation of profits from the entrepreneurial or managerial efforts of others,’ distinguishing it from a motive to use or consume the item purchased. The ‘profits’ need not be immediate dividends; they can include capital appreciation or other financial gains resulting from the success of the enterprise.

Many digital assets are explicitly marketed with an emphasis on potential price appreciation, roadmap milestones, and the growth of their underlying ecosystem, all of which align with an expectation of profits for investors.

4.2.4 Solely from the Efforts of Others

This is arguably the most contentious element when applying the Howey Test to digital assets, particularly those seeking to be decentralized. The term ‘solely’ has been interpreted broadly by courts, often meaning ‘primarily’ or ‘substantially,’ rather than an absolute exclusion of any investor effort. The focus is on whether the significant managerial and entrepreneurial efforts that drive the expectation of profit come from a promoter or a central group, rather than the investors themselves.

For many initial digital asset offerings (ICO-era tokens), a clear promoter (the development team or foundation) was responsible for building the network, attracting users, securing partnerships, and driving adoption – all efforts upon which the token’s value appreciation was dependent. The investors were largely passive.

The Decentralization Dilemma: The challenge arises when a network aims for decentralization. If a digital asset network becomes sufficiently decentralized—meaning no single entity or identifiable group maintains essential managerial or entrepreneurial efforts—then the fourth prong of the Howey Test might no longer be met. Former SEC Director of Corporation Finance, William Hinman, articulated this idea in a 2018 speech, suggesting that Ether, the native cryptocurrency of the Ethereum blockchain, initially may have been offered as a security but had evolved to a state where its value was no longer ‘solely from the efforts of others,’ making it more akin to a commodity. However, the SEC has not issued formal guidance on how to assess ‘sufficient decentralization,’ leading to continued uncertainty.

4.3 SEC’s Public Stance and Interpretations

SEC Chair Gary Gensler has consistently argued that the vast majority of digital assets currently trading are securities under existing law, primarily because they satisfy the Howey Test. He often points to the continuing efforts of developers, foundations, or other centralized groups that maintain, market, or improve the network, driving the expectation of profit for token holders. This broad interpretation suggests that even tokens with significant utility might still be considered securities if their value is largely dependent on the managerial efforts of a core team.

Critics argue that applying the Howey Test, designed for traditional investment contracts like orange groves, to complex, often open-source, and community-driven digital networks is anachronistic and ill-fitting. They contend that it fails to account for the unique characteristics of digital assets, such as their inherent utility within a network, potential for governance participation, and the distinction between primary issuance (where an investment contract might exist) and secondary market trading (where it might not). The lack of clear SEC guidance on the criteria for decentralization or specific exemptions for utility tokens further complicates matters, often forcing projects into legal limbo or into costly litigation.

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

5. Enforcement Actions and Regulatory Ambiguity

The absence of a tailored legislative framework has compelled both the SEC and the CFTC to assert jurisdiction over digital assets using their existing statutory authorities. This approach has led to a series of high-profile enforcement actions, which, while clarifying the agencies’ respective stances, have also significantly contributed to market uncertainty and the perception of a ‘regulation by enforcement’ strategy.

5.1 SEC Enforcement Actions: Regulating Digital Assets as Securities

The SEC has been particularly active in policing the digital asset space, primarily focusing on unregistered securities offerings and the operation of unregistered exchanges or broker-dealers. Its actions have consistently applied the Howey Test, often with a broad interpretation, to classify various digital assets as securities.

  • The DAO Report (2017): This seminal report of investigation concluded that tokens offered and sold by ‘The DAO,’ a decentralized autonomous organization, were securities. While not an enforcement action, it served as a clear warning to the industry that many ICOs would be scrutinized under securities laws. The report set the precedent that the label ‘decentralized’ does not automatically exempt an offering from SEC oversight if the economic reality meets the Howey Test criteria.

  • Telegram (2020): In SEC v. Telegram Group Inc., the SEC successfully halted the distribution of Telegram’s ‘Gram’ tokens, arguing that the initial sale to institutional investors, even under SAFTs (Simple Agreements for Future Tokens), constituted an unregistered securities offering. The court agreed, preventing the launch of the TON blockchain, emphasizing that the subsequent sale of these tokens into the secondary market would also be part of the unregistered distribution of securities.

  • Ripple (XRP) (Ongoing): The lawsuit SEC v. Ripple Labs Inc. (filed in December 2020) is one of the most closely watched cases. The SEC alleged that Ripple and its executives engaged in an unregistered, ongoing offering of XRP, totaling over $1.3 billion. The case has raised crucial questions about the classification of digital assets and their secondary market sales. In July 2023, the court delivered a split decision, ruling that institutional sales of XRP by Ripple constituted unregistered securities offerings, but programmatic sales (to retail buyers on exchanges) did not qualify as investment contracts. This ruling introduced further complexity, suggesting that a digital asset’s classification might depend on the context of its sale rather than being an inherent quality of the asset itself. This partial victory for Ripple was a significant development, challenging the SEC’s blanket assertion over all sales of a token.

  • LBRY (LBC) (2021): In SEC v. LBRY Inc., a federal court ruled that the LBRY Credit (LBC) tokens were securities, even though LBRY argued they were utility tokens integral to its decentralized content-sharing platform. The court found that LBRY actively promoted the token as an investment opportunity and its efforts directly impacted the token’s value. This case underscored the SEC’s position that utility does not preclude security status.

  • Crypto Exchanges and Lending Platforms: The SEC has increasingly targeted crypto exchanges and lending platforms, alleging they operate as unregistered national securities exchanges, broker-dealers, or clearing agencies, or offer unregistered securities. Examples include actions against BlockFi (for unregistered lending products and investment company registration failures, resulting in a $100 million settlement in 2022), Kraken (for failing to register the offer and sale of its crypto asset staking-as-a-service program, settling for $30 million in 2023), Coinbase (sued in 2023 for operating an unregistered exchange, broker, and clearing agency, and for offering unregistered securities through its staking program), and Binance and its founder Changpeng Zhao (sued in 2023 for operating unregistered exchanges, offering unregistered securities, and commingling customer funds, among other serious allegations). These actions signify the SEC’s broad view that many digital assets traded on these platforms are securities and that the platforms themselves must comply with securities regulations.

5.2 CFTC Enforcement Actions: Focusing on Commodities and Derivatives

The CFTC, while having a narrower mandate for spot digital asset markets (primarily anti-fraud and anti-manipulation authority for digital assets deemed commodities), has been assertive in enforcing its jurisdiction over derivatives trading and fraudulent schemes involving digital commodities.

  • Coinflip, Inc. and Francisco Riordan (2015): As noted, this was a landmark case where the CFTC declared Bitcoin a ‘commodity’ and pursued action against an unregistered platform offering Bitcoin options, establishing its authority over derivatives based on virtual currencies.

  • BitMEX (2020): The CFTC, alongside the Department of Justice, filed charges against the operators of BitMEX, a large cryptocurrency derivatives exchange, for operating an unregistered trading platform and violating anti-money laundering (AML) regulations. This case highlighted the CFTC’s focus on ensuring that derivatives platforms adhere to U.S. regulatory standards, even if based offshore.

  • Kraken (2021): The CFTC charged Payward Ventures, Inc. d/b/a Kraken, an unregistered entity, with illegally offering margined retail commodity transactions in digital assets to U.S. customers and failing to register as a futures commission merchant. Kraken paid a $1.25 million civil monetary penalty.

  • Ooki DAO (2022): In a novel enforcement action, the CFTC sued Ooki DAO, a decentralized autonomous organization, for offering illegal, off-exchange retail commodity leveraged and margined transactions and for failing to register as a futures commission merchant. The CFTC successfully served the DAO via its online help bot and website, and the court affirmed that the DAO was a ‘person’ under the CEA and could be held liable. This case set a significant precedent regarding the legal accountability of DAOs.

5.3 Consequences of Regulatory Ambiguity

The simultaneous, and sometimes conflicting, enforcement activities of the SEC and CFTC have created a highly ambiguous regulatory environment with several negative ramifications:

  • Regulatory Arbitrage: The lack of clarity has encouraged some entities to seek jurisdictions with less stringent or more favorable regulations, potentially leading to a ‘race to the bottom’ or the flight of innovation from the U.S.
  • Litigation and Compliance Costs: Digital asset projects, exchanges, and lending platforms face immense legal and compliance costs. The threat of enforcement forces them to spend significant resources on legal defense and navigating an uncertain landscape, diverting funds from innovation and product development.
  • Inconsistent Outcomes: Similar digital assets or business models may face different regulatory treatments depending on whether the SEC or CFTC (or even state regulators) asserts jurisdiction, leading to an unfair and unpredictable market.
  • Stifled Innovation: Many legitimate startups are hesitant to launch products or services in the U.S. due to fear of retrospective enforcement or the prohibitive costs of navigating a complex and uncertain regulatory maze. This can hinder the development of beneficial blockchain technologies.
  • Investor Confusion and Risk: While regulatory actions aim to protect investors, the inconsistent approach can leave investors confused about which assets are regulated, by whom, and what protections they are afforded. This can lead to reduced market liquidity and participation, or conversely, expose investors to unregulated risks if they turn to offshore platforms.

The overlapping enforcement, coupled with the absence of clear legislative mandates, underscores the urgent need for a more coherent and harmonized regulatory framework to govern the rapidly evolving digital asset market.

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

6. Impact on the Digital Asset Market

The enduring jurisdictional uncertainty between the SEC and CFTC has cast a long shadow over the digital asset market, impacting various facets from technological innovation to investor participation and market structure. This pervasive ambiguity is widely cited as a significant impediment to the healthy development and mainstream adoption of blockchain technology and digital assets in the United States.

6.1 Innovation Stifling

One of the most profound impacts of regulatory ambiguity is the chilling effect it has on innovation. Startups and established technology companies venturing into the digital asset space face an unpredictable legal landscape, which can be a formidable deterrent:

  • High Compliance Costs and Legal Risk: Developing new digital asset technologies or offering related services necessitates substantial upfront investment in legal counsel to navigate potential classification issues. Companies fear that a product deemed legal today could be retrospectively classified as an unregistered security tomorrow, leading to massive fines, disgorgement, and reputational damage. This constant threat of litigation diverts resources away from research, development, and market expansion.
  • Uncertainty as a Barrier to Entry: Entrepreneurs and developers with innovative ideas may choose not to pursue them in the U.S. or may migrate their operations offshore to jurisdictions with clearer, more welcoming regulatory environments (e.g., Singapore, the UAE, parts of Europe with MiCA regulations). This ‘regulatory brain drain’ can deprive the U.S. of leadership in a critical emerging technology sector.
  • Delayed Product Launches and Market Access: The cautious approach induced by regulatory uncertainty often results in delayed product launches or restricted access for U.S. customers. Companies may choose to build and deploy their solutions for non-U.S. markets first, or entirely exclude U.S. users, fearing enforcement actions.
  • Limited Institutional Participation: Major financial institutions, which could bring significant capital, expertise, and legitimacy to the digital asset market, are often hesitant to engage deeply due to the unclear regulatory environment and associated compliance risks. Their absence limits market liquidity, depth, and overall maturation.

6.2 Investor Uncertainty

While a core mandate of the SEC is investor protection, the current ambiguity paradoxically creates its own set of risks and confusion for investors:

  • Lack of Clear Protections: When a digital asset’s regulatory status is unclear, investors are uncertain about what protections, if any, they are entitled to. If an asset is a security, it benefits from disclosure requirements and anti-fraud provisions under securities law. If it is a commodity, it is largely covered by the CFTC’s anti-fraud and anti-manipulation authority for spot markets. The current blurred lines mean investors might mistakenly assume protections that do not apply, or conversely, shy away from legitimate opportunities due to perceived risk.
  • Inconsistent Disclosure Standards: For assets not clearly deemed securities, there are no mandated disclosure requirements akin to those for traditional public companies. This information asymmetry leaves retail investors vulnerable to projects with insufficient transparency, potentially leading to misinformed investment decisions or susceptibility to scams.
  • Market Manipulation Concerns: Unregulated or ambiguously regulated markets can be more susceptible to manipulative practices, such as ‘pump and dump’ schemes, insider trading, and wash trading, which can harm unsuspecting investors. While both agencies have anti-fraud mandates, a comprehensive framework is needed to proactively prevent such abuses across the entire digital asset spectrum.
  • Reduced Market Liquidity and Growth: Investor apprehension due to regulatory uncertainty can lead to reduced participation, lower trading volumes, and decreased liquidity. This can hinder the efficient pricing of digital assets and limit the overall growth and maturation of the market.

6.3 Market Fragmentation

The federal jurisdictional dispute is further compounded by a patchwork of state-level regulations and differing international approaches, leading to significant market fragmentation:

  • State-Level Patchwork: Several U.S. states have enacted their own digital asset regulations (e.g., New York’s BitLicense), creating a complex and often inconsistent regulatory landscape that companies must navigate. This forces businesses to apply for multiple licenses and comply with varying rules across different states, increasing operational costs and complexity.
  • International Discrepancies: Different countries and economic blocs are adopting divergent approaches to digital asset regulation. The European Union’s Markets in Crypto-Assets (MiCA) regulation, for example, provides a comprehensive framework for crypto-asset issuers and service providers, offering greater clarity than the current U.S. situation. Such discrepancies incentivize companies to locate in jurisdictions with clearer rules, further fragmenting the global market and potentially placing the U.S. at a competitive disadvantage.
  • Operational Challenges for Businesses: For digital asset businesses, operating across these fragmented regulatory environments is a monumental challenge. It complicates compliance, increases legal overheads, and can lead to situations where a product legal in one jurisdiction is illegal in another, or where compliance with one set of rules conflicts with another.

6.4 Systemic Risk Concerns

As the digital asset market grows in size and interconnectedness with traditional finance, the lack of coherent regulation raises concerns about potential systemic risks:

  • Interconnectedness: The increasing integration of digital assets into broader financial markets, especially through institutional adoption and the emergence of stablecoins and tokenized assets, means that instability in the digital asset sector could spill over into traditional financial systems.
  • Stability of Key Components: The collapse of major digital asset firms (e.g., FTX, Terra/Luna, Celsius) and the volatility of stablecoins in recent years have underscored the need for robust oversight of critical market infrastructure, stablecoin issuers, and large intermediaries. Regulatory gaps can exacerbate these risks.
  • Data and Transparency Gaps: Without clear reporting and disclosure requirements, regulators may lack the comprehensive data necessary to monitor risks effectively, assess market health, and intervene proactively when necessary.

In essence, the ongoing regulatory uncertainty is not merely a bureaucratic squabble but a critical barrier to the safe, efficient, and innovative development of a nascent, yet potentially transformative, financial sector. It highlights the urgent need for legislative intervention to provide clarity and establish a stable foundation for the digital asset economy.

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

7. Legislative Efforts to Clarify Jurisdiction

Recognizing the pervasive challenges posed by regulatory ambiguity, legislative bodies in the United States have embarked on efforts to craft comprehensive frameworks for digital asset regulation. These initiatives aim to resolve the long-standing jurisdictional disputes between the SEC and CFTC, provide legal certainty, and foster innovation while safeguarding investors and maintaining market integrity. Two prominent legislative proposals stand out: the Responsible Financial Innovation Act (RFIA) and the Financial Innovation and Technology for the 21st Century Act (FIT21 Act).

7.1 The Responsible Financial Innovation Act (RFIA)

The Responsible Financial Innovation Act (RFIA), commonly known as the Lummis-Gillibrand bill, was initially introduced in June 2022 by Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY). It represents one of the most comprehensive bipartisan attempts to establish a robust regulatory framework for digital assets in the U.S. The bill’s philosophy is rooted in integrating digital assets into existing financial laws where appropriate, while also creating new definitions and authorities tailored to their unique characteristics.

Key Provisions and Objectives:

  • Clear Definitions: The RFIA seeks to provide clear definitions for ‘digital assets,’ ‘virtual currencies,’ and crucially, ‘ancillary assets.’ This latter definition is particularly innovative: an ‘ancillary asset’ is a digital asset sold as part of an investment contract but that, over time, becomes sufficiently decentralized that it no longer qualifies as a security. This concept aims to address the ‘decentralization dilemma’ and the SEC’s current ‘once a security, always a security’ approach, creating a pathway for tokens to transition from security to commodity status.
  • CFTC as Primary Regulator for Digital Commodities: A cornerstone of the RFIA is the explicit designation of the CFTC as the primary regulator for the spot market of ‘digital commodities.’ This would be a significant expansion of the CFTC’s traditional authority, moving beyond just derivatives to oversee cash markets for assets like Bitcoin and, potentially, decentralized ancillary assets. The CFTC would be tasked with establishing rules for trading, custody, and settlement of these assets.
  • SEC Retains Jurisdiction for Digital Asset Securities: The bill clarifies that the SEC would retain authority over ‘digital asset securities,’ which are digital assets that meet the definition of a security, including those that clearly fit the Howey Test and have not sufficiently decentralized to become ancillary assets. This aims to reinforce the SEC’s role in protecting investors in offerings that resemble traditional securities.
  • Stablecoin Regulation: The RFIA proposes a comprehensive framework for payment stablecoins, requiring issuers to hold sufficient reserves (1:1 with fiat currency or highly liquid assets), undergo regular audits, and meet specific capitalization and liquidity requirements. This addresses a critical area of financial stability concern.
  • Decentralized Autonomous Organizations (DAOs): The bill attempts to provide a legal structure for DAOs, defining them and proposing how they might be organized and taxed, recognizing their unique governance models.
  • Tax Treatment: It seeks to modernize tax laws for digital assets, including a de minimis exemption for small personal transactions (e.g., under $200) to simplify tax reporting for everyday use of cryptocurrencies.
  • Interagency Coordination: The RFIA also calls for enhanced coordination between the SEC and CFTC, along with other federal financial regulators, to ensure a cohesive approach to digital asset oversight.

Reception and Challenges: The RFIA has garnered support from segments of the digital asset industry, which view it as a crucial step towards regulatory clarity and certainty. However, it has faced resistance from the SEC, which has expressed concerns about the proposed shift in jurisdiction and the potential narrowing of its authority over certain digital assets. Traditional financial institutions and some consumer protection groups have also raised questions about the scope of the CFTC’s expanded powers and the adequacy of protections for retail investors.

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

The Financial Innovation and Technology for the 21st Century Act (FIT21 Act) is a House bill that passed the House of Representatives in May 2024 with bipartisan support. Like the RFIA, FIT21 seeks to establish a comprehensive framework to delineate the regulatory responsibilities of the SEC and CFTC concerning digital assets.

Key Provisions and Objectives:

  • Digital Commodity Definition: FIT21 explicitly defines ‘digital commodities’ and grants the CFTC primary regulatory authority over these assets. This includes spot markets for digital commodities. Crucially, it provides a clearer framework for distinguishing between digital commodities and digital asset securities.
  • Digital Asset Security Definition: The bill outlines criteria for what constitutes a ‘digital asset security,’ falling under the SEC’s jurisdiction. It incorporates aspects of the Howey Test but attempts to provide more explicit guidance for digital assets.
  • Decentralization Test: A key feature of FIT21 is its attempt to operationalize the concept of decentralization. It proposes specific criteria for when a blockchain network can be deemed ‘functional and decentralized’ (e.g., no single person or group has unilateral control, sufficient number of active participants). Once a network is certified as decentralized, its associated token would generally be treated as a commodity under CFTC oversight, even if it might have initially been offered as a security. This provides a formal pathway for ‘ancillary assets’ to transition from SEC to CFTC oversight.
  • Consumer Protection and Market Integrity: The bill includes provisions aimed at protecting consumers and ensuring market integrity, requiring disclosures for digital assets and empowering both agencies to act against fraud and manipulation within their respective purviews.
  • Registration Requirements: It establishes registration requirements for digital asset exchanges, brokers, and dealers, tailoring them to the specific characteristics of digital assets.

Reception and Challenges: The passage of FIT21 by the House marked a significant legislative milestone, reflecting growing bipartisan consensus on the need for a comprehensive digital asset framework. However, like the RFIA, it faces hurdles in the Senate and potential opposition from the SEC, which continues to advocate for its broad authority over the crypto market. Critics also raise questions about the practical application of the decentralization test and whether it adequately safeguards retail investors during the transition period of a token’s classification.

7.3 Other Related Legislative Efforts

While RFIA and FIT21 are the most comprehensive, other legislative initiatives also underscore the political will to address digital asset regulation:

  • Digital Commodity Exchange Act (DCEA): Earlier proposals, such as the DCEA, focused primarily on empowering the CFTC to regulate spot markets for digital commodities, reflecting an industry preference for the CFTC’s principles-based approach over the SEC’s disclosure-heavy regime.
  • Targeted Bills: Various other bills have addressed specific aspects, such as stablecoin regulation, central bank digital currencies (CBDCs), or specific reporting requirements for digital asset taxes.

These legislative efforts represent a crucial attempt to move beyond ‘regulation by enforcement’ and establish a predictable, well-defined regulatory environment for digital assets. The ongoing dialogue, debate, and potential compromises between these proposals will ultimately shape the future of digital asset oversight in the U.S., influencing its competitiveness in the global financial landscape.

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

8. Conclusion

The rapid and often unpredictable evolution of digital assets has presented a profound challenge to existing regulatory frameworks in the United States, most prominently manifesting as a protracted jurisdictional dispute between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This detailed examination has underscored that the core of this conflict lies in the inability of traditional statutes, designed for conventional securities and commodities, to adequately categorize and govern the hybrid characteristics of blockchain-based tokens.

Historically, the SEC and CFTC have operated within well-defined, albeit separate, regulatory domains. The SEC’s investor protection mandate, primarily executed through disclosure requirements and the flexible application of the ‘Howey Test,’ has led it to classify a vast majority of digital assets as securities. Conversely, the CFTC, leveraging the broad definition of ‘commodity’ within the Commodity Exchange Act, has asserted jurisdiction over assets like Bitcoin and derivative products based on them, focusing on market integrity and preventing fraud. This bifurcated approach, while rooted in each agency’s statutory authority, has created significant regulatory ambiguity. This uncertainty has not only led to inconsistent enforcement actions but has also imposed substantial burdens on market participants, fostering an environment where innovation is stifled, investor confidence is eroded, and the U.S. risks falling behind other jurisdictions that have embraced clearer, more cohesive regulatory postures.

The profound impact of this ambiguity is multi-faceted: it deters legitimate innovation due to the fear of retrospective enforcement and prohibitive compliance costs; it confuses investors regarding their rights and protections; it fragments the market through a patchwork of federal, state, and international rules; and it raises concerns about potential systemic risks as the digital asset ecosystem grows. The repeated calls for clarity from industry, academics, and even within government itself underscore the urgency of addressing this regulatory vacuum.

In response, legislative bodies have begun to make earnest efforts to establish a fit-for-purpose framework. Bills such as the Responsible Financial Innovation Act (RFIA) and the Financial Innovation and Technology for the 21st Century Act (FIT21 Act) represent significant strides towards this goal. These proposals aim to provide clear definitions for digital assets, explicitly delineate the jurisdictional boundaries between the SEC and CFTC, establish pathways for tokens to transition between regulatory categories based on their level of decentralization, and introduce targeted regulations for critical components like stablecoins and DAOs. While these legislative initiatives face their own challenges and debates, particularly regarding the precise division of authority and the implementation of ‘decentralization’ criteria, they signify a crucial shift towards proactive, comprehensive regulation rather than reactive enforcement.

Moving forward, the successful navigation of this complex landscape will hinge on continued dialogue, bipartisan cooperation, and a willingness to adapt traditional regulatory paradigms to the realities of a technologically driven future. A balanced approach that prioritizes both robust investor protection and the nurturing of innovation is paramount. As digital assets continue to evolve in their functionality and economic significance, a clear, consistent, and adaptable regulatory framework will not only secure the integrity of financial markets but also ensure the United States remains at the forefront of financial technological advancement.

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

References

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