Digital Assets and Regulatory Fragmentation: The SEC versus the CFTC

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 SEC and the 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 actions of the regulators involved. Empirical literature on digital asset innovations, however, has not paid sufficient attention to the impact of the 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 scholarship on financial innovation, and equip policymakers with necessary empirical data.

Our empirical study compares how the SEC and the 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. It is erroneous to assume, however, that this is because crypto markets 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. The unfavorable reaction to regulation may be explained by who enforces substantive law (the CFTC or the SEC). We provide theoretical explanations and underscore that, while U.S.-led enforcement is generally viewed as costly, some types of regulation may have the potential to improve market quality with positive valuation implications. We hope that our analysis will provide 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