Cryptocurrency exchanges may get a clear path to registration with the US Securities and Exchange Commission (SEC) so they can trade digital securities, commodities and fixed currencies all in one place, according to a proposal by the Republican chairs of both House committees trying to craft a bill.
In the most significant cryptocurrency oversight proposal Congress has come up with this year, the proposed legislation would control many frameworks sought by the digital asset sector.
However, the draft legislation – released last Friday by leaders of the House Financial Services Committee and House Agriculture Committee – has yet to receive Democratic support and comes with caveats, including the SEC’s ongoing rulemaking authority in determining which assets are securities and will remain under its authority.
How they will distinguish which are securities or commodities
On the most critical question – how to distinguish what is a commodity and what is a movable asset – the “discussion draft” notes that any of the regulated cryptocurrency companies that handle tokens or cryptocurrency can claim that the assets are commodities, but must explain in detail how they operate and demonstrate that they are truly decentralized, certifying that no one person runs the project or controls more than 20% of the assets.
And the SEC can challenge this claim if it can provide a “detailed analysis” that demonstrates that the asset is within its jurisdiction.
However, for some cryptocurrency platforms the categorization of each asset could be less important because a cryptocurrency exchange once registered with the SEC – designated as an alternative trading system (ATS) – will have the ability to create trades in both stablecoins and commodities.
Thus, these platforms would potentially handle all of a cryptocurrency investor’s trades in one place, as long as they also register with the US Commodity Futures Trading Commission (CFTC).
The role of the CFTC
For the CFTC, the draft law would create a new category of registered entities: a digital commodity exchange where certified cryptocurrency products would be traded.
The new exchanges would have to comply with the usual company protections – including full segregation of customer assets – and ensure that they are not vulnerable to market manipulation.
And the agency would have new authority to directly trade cryptocurrency commodities, which was also a feature of other bills considered by Congress last year.
As is currently the status quo in the US, both the SEC and the CFTC have waged an enforcement battle against cryptocurrency companies, including some of the largest trading platforms, and any cryptocurrency-related rulemaking efforts at the SEC have moved toward dramatically limiting cryptocurrency’s ties to traditional financial systems.
While SEC Chairman Gary Gensler insists that existing securities laws are adequate, this legislation – if implemented – will force him to modernize regulations to oversee cryptocurrencies.
Finding common ground
As the product of negotiations between Rep. Patrick McHenry (R-N.C.), the chairman of the Finance Committee, and Rep. Glenn “GT” Thompson (R-Pa.), the chairman of the Agriculture Committee, this proposed bill has yet to receive the necessary input from their Democratic counterparts.
It’s a “discussion draft” intended to start a thorough debate in the U.S., according to a senior policy official familiar with the legislation, who said the chairmen hope Democrats will come up with their own version and the sides can begin to find common ground.
The other key points of the proposed legislation
Below we list some of the other key features of their proposal:
Projects that hold tokens, which they want to be treated as commodities, would have to go through a certification process with the CFTC, which would include detailed disclosures about their activities.
While the agencies are working on the joint regulations, the legislation notes that existing cryptocurrency assets would be exempt from enforcement actions – which would act as a safe harbor that would allow companies and investors to continue trading during a potentially long wait for the SEC and CFTC to complete the enactment of new rules for the industry.
Broker-dealers will also be able to take custody of cryptocurrency assets – an issue the firm is already trying to resolve with its recent proposed rule to require registered investment advisors to hold their clients’ money only with so-called qualified custodians.
House Republicans are also calling for studies on decentralized finance (DeFi) and non-exchangeable digital assets (NFTs), suggesting that regulation of these parts of the economy may be pushed further.
At this stage, the proposed legislation does not include appropriations, meaning that the SEC and CFTC will not receive new funds for the huge increase in their workload or the significant staffing increase likely needed at the commodities firm.
The people who worked on the bill noted that they decided it would be best to leave the discussion of money, or appropriations, to the regular congressional budget process.
Senate approval is also required
And while committee staffs have been in contact with their Senate counterparts, no one can say for sure what Sen. Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee, wants to do about cryptocurrencies. Even if the bill is passed, it needs Senate approval to be implemented.
The bill is now becoming part of a much broader debate in the US, not only with House and Senate Democrats, but also about how it will fit in with the other major effort in Congress this year: the House Financial Services Committee’s plans to create a bill involving stablecoins, one from each party.
Lawmakers from both parties said that addressing oversight of stablecoins, which are typically dollar-linked currencies that U.S. regulators have expressed the view that they could raise broader financial stability concerns, could be the first achievement on cryptocurrencies by Congress.
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