A new bill could bring cryptocurrency exchanges under a single federal framework.
The Digital Commodity Exchange Act of 2020, introduced Thursday by Rep. Michael Conaway (R-Texas), seeks to create a federal definition of “digital commodity exchanges,” putting them in their own legal category and charging the Commodity Futures Trading Commission (CFTC) with oversight.
The bill outlines a new framework for digital currencies, treating them similarly to commodities under the Commodities Exchange Act, which governs that asset class. Under the framework, crypto exchanges would enjoy a federal jurisdiction, allowing them to operate in the entire U.S. rather than applying for 49 different state money transmission licenses. The DCEA also allows for certain types of initial coin offerings.
If passed, the act would streamline a number of disparate cryptocurrency regulations in the U.S., creating legal clarity for token issuers and lowering the barrier to entry for exchanges hoping to operate in a compliant manner.
“The proposed legislation builds on the existing commodity market practices required of Futures Commission Merchants (FCMs) to protect customer assets. DCEs would be required to segregate customer assets and hold them in separately regulated entities which are licensed to custody digital assets,” a summary of the bill said.
Conaway is the ranking member on the House Committee on Agriculture, which oversees commodity exchanges in the U.S. The committee’s Senate counterpart, the Senate Committee on Agriculture, Nutrition and Forestry, oversees the CFTC.
The DCEA wouldn’t create prescriptive rules on how exchanges can comply with the new law. Rather, it would describe the requirements and let the exchanges themselves figure out the best way to meet those requirements.
"The CEA works through principles-based regulation, laying out high-level principles – 'core principles' – that a regulated entity has to meet,” a committee aide told CoinDesk. “The regulated entity is given flexibility on how to meet those principles, but the CFTC has oversight and can decide if it has met those principles or not. The regulatory regime under the CEA works in large part because it creates a more flexible framework and lets regulated entities be more innovative."
The idea of regulating cryptocurrencies under a single, nationwide regime has attracted renewed interest this summer. The Conference of State Bank Supervisors announced earlier this month that it was consolidating its supervision exams for certain crypto exchanges, and there may be plans in the works to streamline the application process for startups to avoid needing more than 50 state and territory licenses in order to operate nationally.
The Office of the Comptroller of the Currency, a federal banking regulator, wants to bypass the state-by-state regime entirely, instead creating a national payment charter that would let exchanges operate across state lines.
The DCEA follows the latter path, but shifts crypto assets into a familiar framework and grants the CFTC primary supervisory authority over the space.
If enacted, the bill would preempt the state money transmitter licensing regime entirely.
"What we’re proposing is first, a simplification of the multi-state money transmitter license regime but, second, a more appropriate regime which addresses all the aspects of the business of operating a trading venue,” Conaway said through a spokesperson.
The DCEA would essentially mimic existing regulations around futures commission merchants, creating similar rules around customer fund protection, cybersecurity, capital requirements, public reporting requirements, governance standards, conflict of information reporting and other issues.
"This should also help to better define the line between [Securities and Exchange Commission] and CFTC jurisdiction: pre-sale agreements will continue to be regulated by the SEC, but there will be less need for continued SEC wariness once the tokens are delivered and the network is live because the CFTC will be picking up the regulatory slack and supervising sales to the public upon network launch," said Peter Van Valkenburgh, director of research at industry think tank Coin Center.
State regulators might not have the same authority over order books or matching engines the way federal markets regulators do. In other words, a national regulator like the CFTC might have an easier time finding or stopping wash trading and similarly deceptive practices.
Companies could voluntarily register but would not be required to shift from the state-level regime if they didn’t want to.
"If a company has gone through the work of getting individual state money transmitter licenses and it likes the regime it is operating under, we’re not going to require that it give those up and come into a federal regime,” the aide said. “But, if it does come into a federal regime, with regulations which cover more aspects of its business, it will have the opportunity to innovate and serve customers with more complex products."
Perhaps the more daring aspect of the DCEA is a carve-out for token creation and sales. At present, initial coin offerings fall under the SEC's remit. The federal securities regulator has treated almost all such token sales as securities sales, either bringing enforcement actions against unregistered offerings or allowing registered sales.
Under the DCEA, companies would be able to raise funds by selling tokens to investors, and remain subject to the SEC during this period. However, if the companies then deliver a token which meets the definition of a digital commodity under the new bill, “transactions involving that asset would be subject to the regulatory regime provided in the DCEA,” the document said.
The bill also provides for token presales. This restricts the initial trading or secondary market sales of the tokens to either individuals who could have participated in the original securities sales or under specific conditions.
This changes if and when a regulated exchange believes the token cannot be easily manipulated and lists it for public trading.
The summary likened the process to the one existing designated contract markets follow when listing new derivatives contracts, but noted it will depend on the specific purpose of a digital commodity.
The bill is unlikely to pass before the upcoming election, but with its introduction, the general public can begin providing feedback or suggestions on how to improve it for a future Congressional term.
"The introduction of this bill in this Congress is an important step in a process that is likely to play out more fully when the new Congress convenes in January," Van Valkenburgh said. "At that point we expect to see the bill re-introduced which would then allow for the process including possibly hearings and then committee consideration."
Read the full draft of the bill below:
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