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The U.S.’s main commodities regulator recently told its employees that they are allowed to invest in cryptocurrencies, a determination that came weeks after the agency began overseeing Bitcoin futures.

Under the Commodity Futures Trading Commission’s ethics guidance, workers can trade digital tokens as long as they don’t buy them on margin or have inside information gleaned from their jobs. Investing in the Bitcoin futures that the CFTC polices, however, is barred.

While it’s not known how many people at the CFTC are actively trading the products, the agency’s general counsel, Daniel Davis, told employees in a Feb. 5 memo that the guidelines were being issued after the commission’s ethics office had received “numerous inquiries” about whether the investments were permissible.

The CFTC’s ruling comes at a time when federal agencies are debating whether and how to impose rules on the nascent products that have rapidly become a global investment craze. A number of officials have been wary of putting a government stamp of approval on cryptocurrencies, raising concerns about their wild price swings, their use in illicit transactions and the frequency with which they’ve been hacked and stolen.

Mind-boggling Decision

“This is actually mind-boggling that they are allowing investing in this at all,” said Angela Walch, an associate professor who specializes in digital money and financial stability at St. Mary’s University School of Law. “It could absolutely skew their regulatory decisions.”

J. Christopher Giancarlo. Photographer: Andrew Harrer/Bloomberg

Erica Richardson, a spokeswoman for CFTC Chairman J. Christopher Giancarlo, said he was among those asking for the ethics guidance because he wants to make sure that agency employees dealing with virtual currency regulations or investigations aren’t investing in them.

“The chairman has made it clear that staff members who own Bitcoin should not participate in matters related to Bitcoin, as it presents a conflict of interest,” she said.

The CFTC has been ahead of the crypto frenzy, first declaring in 2014 that the digital currency was a commodity subject to the agency’s oversight. Still, that supervision has mostly consisted of enforcement actions to halt alleged frauds. Much of the trading for coins now takes place on lightly regulated exchanges or in foreign countries where the commission has little reach.

Oversight Forefront

That began to change late last year when Giancarlo allowed two major U.S. exchanges to offer Bitcoin futures -- a move that placed his agency at the forefront of crypto oversight. The decision concerned some other regulators who thought Giancarlo was moving too quickly, people familiar with the matter have said.

An enthusiastic promoter of technology who previously worked at a swaps brokerage, Giancarlo became an online folk hero for his seemingly supportive comments about cryptocurrencies at a congressional hearing this month. He gained thousands of Twitter followers and was the subject of a series of memes where he was called Bitcoin Jesus, crypto dad and even encouraged to run for president.

(In one sign of the potential pitfalls, however, Giancarlo’s Twitter handle was mimicked by an impostor shortly after his testimony. Accounts with his picture popped up asking for donations of Bitcoin to “support movement.” Giancarlo later tweeted that “NO ONE” should send him any money.)

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The guidance on trading digital currencies was based on the CFTC’s standard ethics rules, which allow investments in physical commodities. That’s because the agency doesn’t regulate markets where corn or oil, for example, are bought and sold. Instead, it regulates futures contracts derived from oil or corn prices.

‘Employees’ Ethics’

In his memo, Davis, the CFTC’s chief lawyer, wrote that because the agency has determined digital tokens are a commodity, workers can trade them like they would any other commodity.

The guidance does note that staff members shouldn’t invest if they have nonpublic information that could impact the trade. That could potentially arise if they are handling an enforcement case, conducting surveillance or working on a regulation involving digital tokens.

Davis also said that employees need to ask if the transaction would cause “a reasonable person” with all the facts to question their ethics.

“In this environment, the situation is ripe for the public to question the personal ethics of employees engaging in cryptocurrency transactions,” Davis wrote. “Please keep in mind that you must endeavor to avoid any actions creating the appearance that you are violating the law or government and commission ethical standards.”

SEC’s Policies

The Securities and Exchange Commission also allows its workers to invest in digital currencies, with some exceptions similar to the CFTC. However, the SEC has less responsibility for overseeing the crypto markets.

The SEC’s jurisdiction right now is largely limited to so-called initial coin offerings, where companies raise money by selling tokens. The agency’s employees cannot invest in those until seven days after the ICO, according to a memo its ethics counsel issued in January. The SEC also requires its staff to pre-clear all their digital currency trades -- a requirement that the CFTC doesn’t have.

Attorneys specializing in government ethics were split on whether CFTC employees should be allowed to trade the products.

There is no government-wide policy on the investments and each agency has to set its own rules. That task is made harder because digital currencies are relatively new and there isn’t broad agreement about how they should be classified.

Regulators Grappling

Regulators and government ethics lawyers are grappling with a number of tricky questions, including whether the coins are commodities, currencies or securities. Another potential issue is whether they are akin to an investment or more like a pile of cash in a drawer.

“Logically it makes sense to apply the same standard they apply to Bitcoin as they apply to other commodities,” said Kathleen Clark, a professor at Washington University School of Law. While digital currencies may be “newfangled,” the CFTC’s “ethics standards seem to be general enough to cover it.”

However, Richard Painter who specializes in securities law and was a White House ethics lawyer under President George W. Bush, said that cryptocurrencies seem to be more like futures than physical commodities.

While most CFTC employees aren’t likely to trade barrels of oil or bushels of wheat, partly because they could need a warehouse to store them, digital coins don’t present that problem.

‘Looks Terrible’

Also, regulatory decisions can have an impact on the underlying markets. One major example: The price of Bitcoin jumped 13 percent on Dec. 1, the day of the CFTC’s announcement that it was allowing Bitcoin futures.

The CFTC should be trying to regulate digital tokens, not allowing its workers to speculate on them, added Painter, a professor at University of Minnesota Law School. “This just looks terrible.”

— With assistance by Benjamin Bain