With FairX acquisition, is Coinbase moving away from the SEC and towards CFTC

When it comes to the American crypto sector, one huge source of confusion is the matter of which body should largely regulate crypto exchanges and their products. Is it the state government[s], the SEC, the CFTC, or Congress? In fact, one crypto exchange’s acquisition again brings up this question.

Let’s play fair now

On 13 January, Coinbase announced that it was acquiring the CFTC-regulated derivatives exchange FairX. An excerpt from the official press release noted,

“Today, we’re announcing the acquisition of FairX, a CFTC-regulated derivatives exchange or Designated Contract Market…Through this acquisition, we plan to bring regulated crypto derivatives to market, initially through FairX’s existing partner ecosystem.”

It’s important to note this development is far more than a business strategy. Rather, it might be a sign that Coinbase is venturing deeper into the domain of crypto services and products regulated by the Commodity Futures Trading Commission [CFTC].

What’s more, if Coinbase continues with this strategy, it could signal a shift in which the regulatory body might have the final say over the company’s activities.

An alphabet soup of regulators

Coinbase is far from being the only industry stakeholder with an interest in CFTC-regulation. The Digital Commodity Exchange Act of 2020 is another piece of proposed legislation that aims to streamline the regulation of crypto exchanges or trading platforms, by giving the CFTC more authority to handle them.

It’s vital to remember here that the members of the CFTC and the SEC don’t necessarily see eye-to-eye on regulation. In fact, former CFTC Commissioner Brian Quintenz – when in conversation with a Ripple official – criticized the common “Wild West” comparison used to describe the crypto sector. Quintenz said,

“You know, the language that was used in this case is not language of public policy. It’s language of politics, it’s a language of persuasion and manipulation.”

The power of words

Earlier, SEC Chair Gary Gensler shared his comments from a 2021 speech at the Securities Enforcement Forum. Speaking about legal action, he said,

“Such high-impact cases are important. They change behavior. They send a message to the rest of the market, to participants of various sizes, that certain misconduct will not be permitted. Some market participants may call this “regulation by enforcement.” I just call it “enforcement.”  “

One critic of this view was Ripple’s General Counsel Stuart Alderoty, who felt that the SEC’s approach would chill activity in the crypto sector.

His speech says, “A high-impact case pulls many other actors back from the line.” Does that sound like regulation by enforcement to anyone else?! The SEC intends that the mere filing of a case chills behavior – regardless of whether they are right on the law or the facts. 3/4

— Stuart Alderoty (@s_alderoty) January 12, 2022