REGULATORY FRAGMENTATION: INVESTOR REACTION TO SEC AND CFTC ENFORCEMENT IN CRYPTO MARKETS

Abstract

In 2022, the White House released a regulatory framework calling for a “whole-of-government” approach to digital asset innovations. Although justified and necessary, this systems-based strategy discounts the reality that U.S. financial regulation is fundamentally fragmented. There are signs of a turf war between the major digital asset regulators, the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC). Both agencies claim jurisdiction over overlapping classes of digital assets, and several congressional bills recently proposed to radically redistribute this jurisdiction.
Policy reforms under the conditions of regulatory fragmentation need empirical data comparing the effect of the regulators’ actions. Empirical literature on digital asset innovations, however, has not paid sufficient attention to the impact of U.S.-specific factors such as regulatory fragmentation. Nor has it explored the importance of U.S. regulators to global digital asset markets. We aim to fill this gap, contribute to the scholarship on financial innovation, and equip policymakers with necessary empirical data.
Our empirical study compares how the SEC and CFTC regulate crypto primarily via enforcement and how the global digital asset market reacts to the agencies. The market distinguishes between the Commissions and reacts particularly negatively to SEC enforcement. Crypto markets, however, should not be assumed to reject formal law or strong enforcement. Digital asset prices exhibit a more positive reaction to U.S.-led antifraud efforts, indicating that investors understand the value of market integrity.
We supply theoretical explanations and underscore that although markets generally view U.S.-led enforcement as costly, some types of regulation may have the potential to improve market quality with positive valuation implications. We hope that our analysis provides new information to scholars and policymakers in evaluating the merits of financial reforms, addressing the current fragmentation in financial regulation, resolving turf wars, and advancing the efforts to promote a whole-of-government approach to digital asset innovation.

Keywords: digital assets, financial innovation, financial reform, cryptoassets, the SEC, the CFTC, regulatory fragmentation

JEL Classification: K00, K2, K22