Regulatory Outlook: What will the SEC and CFTC focus on in 2024?

U.S. regulators will consider whether to adopt new rules that could encompass cryptocurrencies, as experts say more enforcement action is imminent.

The Commodity Futures Trading Commission and the Securities and Exchange Commission (SEC) are seeking to control the industry, starting with the indictment of some large cryptocurrency exchanges such as Binance, Kraken, and Coinbase. We had a busy year, including considering regulations.

The SEC has not proposed any cryptocurrency-focused rules, but is considering two rules that could be adopted in the new year. Meanwhile, the CFTC just voted In December, it proposed rules to strengthen customer protections following the collapse of cryptocurrency exchange FTX.

The Block spoke with experts to analyze which rules these agencies will tighten in 2024.

SEC’s Focus

Despite industry backlash, SEC Chairman Gary Gensler has consistently delivered the message that most cryptocurrencies are securities, while urging cryptocurrency exchanges to register with the agency.

“When it comes to cryptocurrencies, it appears that many common cryptocurrencies follow the principles of securities law from the SEC’s perspective, so I don’t think we’ll see a lot of new regulation coming from the SEC,” Tyler said. Gellasch, CEO of the investor-focused Healthy Markets Association. “I think they will continue to do what they do, which will result in a lot of enforcement cases.”

The SEC could adopt two recently proposed rules. One is to impose requirements on custodians and the other is to expand the definition of exchange to circulate on decentralized exchanges.

“I expect both to be finalized in some form,” Gelash said. “Once they are finalized, we’ll see how much impact they have on cryptocurrencies.”

The upcoming election also makes it especially important for SEC Chairman Gensler to finalize these rules, Linda J said.eng, is a Web3 advisor at the Crypto Council for Innovation. Jeng also previously worked at the Federal Reserve, the SEC, and the Treasury.

SEC’s Retention Rules

The SEC voted in February propose Rules requiring registered investment advisers to store cryptocurrencies with a qualified custodian — that custodian must adhere to certain requirements.

Registered investment advisors are subject to custody rules, which require them to hold their assets with a qualified custodian, such as a bank or broker-dealer. These rules, which have not been updated since 2009, can now include cryptocurrencies. SEC Chairman Gensler also warned that depending on how cryptocurrency platforms operate, investment advisors may not be able to trust them as qualified custodians.

Not many custodians know how to manage digital assets, Jeng said. “Then you’re forcing the industry to hire managers who don’t have the necessary expertise,” Jeng said. “And that’s the problem.”

The rules could also lead to systemic financial stability risks by ensuring focus on only a small number of registered custodians, Jeng said.

SEC’s ATS Rules

The SEC also proposed a rule in January 2022 that would expand the definition of an exchange to include decentralized exchanges, which was released again for comment in April. These rules could ultimately require decentralized projects to register with institutions as alternative trading systems.

Under the ATS, DeFi projects must file regular filings with the SEC, make mandatory disclosures, and be subject to strict restrictions on how they operate. said Gellasch of Healthy Markets.

“The industry has been built and grown without regard for securities laws, so if the SEC adopts rules that they have to follow, their ability to operate will very quickly deteriorate,” Gellasch said.

“This rule will probably “break” decentralized exchanges, in part because the only way to comply with them is to become centralized, said Jeng of the Crypto Councils.

CFTC’s Latest Rule Proposals

A little more than a year after the collapse of the FTX cryptocurrency exchange, the CFTC decided last December to propose rules that would strengthen customer protections for those trading through derivatives clearing houses.

The rules, called “Protection of Clearing Member Funds Held by Derivatives Clearing Agencies,” require institutions and DCOs registered for clearing transactions to segregate client funds, including money from individual investors, from their own home funds.

Gellasch said the agency may want to focus on the spot market in the new year.

“There are quite a few things we want to do at the CFTC, particularly focusing on how much access we can have to spot markets,” Gellasch said.

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