Out of the blue, a U.S. lawmaker who previously showed little interest in cryptocurrency has introduced what may be the most sweeping legislation yet to regulate the market.
Rep. Don Beyer's (D-Va.) bill would allow the Treasury Secretary to veto the creation of stablecoins, direct regulators to define rules for decentralized finance (DeFi) and possibly create a charter for crypto exchanges, among other measures.
The 58-page “Digital Asset Market Structure and Investor Protection Act,” which Beyer introduced Thursday, seeks to create an exhaustive regulatory regime for digital assets. It would do so in part by defining which sorts of cryptocurrencies might be securities, which can be treated as commodities, and bolster tax data collecting for reporting purposes.
As such, the bill seems to address a long-standing desire from the industry for regulatory clarity. But where other bills have attempted to address these issues piecemeal, this one covers multiple issues in one fell swoop. It appears to have been thoroughly researched, even if certain provisions rankled crypto supporters.
It’s unclear what sort of support the bill has, or what a possible timeline for its passage might look like, but its breadth and depth have raised eyebrows in crypto policy circles.
“For a proposed legislation that seemingly came out of nowhere, it is incredibly comprehensive and the authors clearly have an understanding of the underlying technology,” said Marc Goldich, a partner at the law firm of Axler Goldich LLC. “It’s going to take some time to unpack and see how it could impact the industry and it will be interesting to see if this bill has legs, but this is the most well-written draft of crypto legislation to date.”
It also comes from a surprising source. Beyer is the chairman of Congress’ Joint Economic Committee and a member of the tax policy-making House Ways and Means Committee. Up until now, his involvement with digital assets appears to have been tangential at most. According to public records, his top two donors in the most recent election cycle were the law firm of Akin Gump and financial information provider IHS Markit, both of which have done some work with digital assets but focus on traditional lines of business.
A spokesperson for Beyer said the bill has been in the works for over a year.
The bill also appears to authorize the Federal Reserve, the U.S.’s central bank, to create a central bank digital currency (CBDC), likely in response to statements from Fed officials saying they weren’t sure they had the authority to do so under its current mandate.
Beyer’s bill, the second legislative proposal around cryptocurrencies this week, comes as lawmakers in the U.S. become increasingly active in the digital asset space. On Tuesday, lawmakers held three different hearings that touched on digital assets. Many of the elected officials expressed skepticism about the industry or different facets, discussing consumer protection concerns or pointing to perceived risks to financial stability.
In the Senate, a bipartisan infrastructure bill currently includes a provision that seeks to raise $28 billion by enforcing a broader set of information reporting requirements for crypto users than the U.S. currently has.
However, this plan remains a narrowly focused part of the infrastructure bill. Beyer’s proposal, in contrast, is all about crypto, and would likely need a co-sponsor on a committee with market jurisdiction (Senate Banking or House Financial Services) to go anywhere.
Securities vs. commodities
Under the terms of Beyer’s bill, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) would have to more firmly define what aspects of the crypto market fall under their respective jurisdictions.
The first section lays out where the SEC’s oversight is focused: if passed, the bill would create a definition for “digital asset securities,” referring to cryptocurrencies or tokens that provide holders with any sort of equity.
If a holder has a right to equity, profits, interest, dividend payments or voting rights, the token would fall under the bill’s definition of a digital asset security.
The term would also apply to tokens issued through an initial coin offering (ICO) meant to fund the development of a product or platform.
The bill also would add digital asset securities to the Securities Exchange Act of 1934’s provision on registration with the SEC and exemptions from such requirements.
Perhaps most importantly, however, is a provision on “desecuritization.” The section lays out a path for a token that is treated as a digital asset security to become a cryptocurrency that will not be treated as a security, echoing SEC Commissioner Hester Peirce’s longstanding efforts to create a safe harbor for crypto projects to get off the ground.
“Registration of any class of digital asset security pursuant to this subsection or status as a security (or both) shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a desecuritization certification with the Commission,” the bill reads.
Beyer's bill says the SEC should evaluate any such application against the criteria for a digital asset security laid out in the section.
Cryptocurrencies that don’t fall under the SEC’s jurisdiction would fall under the CFTC’s, according to the bill. Ahead of that, the bill would have these two agencies publish a proposed rulemaking to classify the 25 most-traded cryptocurrencies and the 25 cryptocurrencies with the highest market capitalizations (so up to 50 total) as either securities or commodities. This data would be sourced from “an appropriate publicly available website” such as CoinMarketCap.
It does not appear that the public or parties can appeal any such designation under the current language.
Several other provisions address different aspects of the U.S. securities regulatory framework, such as Securities Investor Protection Corporation insurance and broker definitions.
The second section, which reiterates what a digital asset security is, focuses on the Commodity Exchange Act, and codifies bitcoin, ether “and their hardforks” (splinter currencies) into law as commodities. This would help enable exchanges to launch derivative products and crypto trading platforms to more comfortably list and trade these assets.
Another section of the bill extensively lays out how the U.S. should look at stablecoins – digital assets that act as substitutes for dollars or other government-issued money – and appears to authorize a Fed-issued CBDC.
The stablecoin provision may create hurdles for issuers. The Treasury Department would have oversight and veto power over the creation and usage of all stablecoins in the U.S. under its terms.
“Beginning on the date of the enactment of this section, no person may issue, use, or permit to be used a digital asset fiat-based stablecoin that is not approved by the Secretary of the Treasury under subsection,” the bill said.
In other words, the bill appears to give the Treasury Department the ability to restrict trading of any and all stablecoins. An issuer would have to apply, and the department would consult with the Fed, the SEC, CFTC and possibly foreign central banks or financial regulators before it decides whether to approve the proposal.
The bill also explicitly prohibits Treasury from grandfathering any stablecoins into its new regime, instead saying all existing stablecoins must apply for permission to continue operations.
“They effectively make it illegal to not only issue fiat-based stablecoins but to also use them. It would be interesting to see how that is enforced and how it relates to algorithmic stablecoins,” said Goldich.
Despite the apparent opposition to private stablecoins, the bill does allow for a blockchain-based version of the dollar.
“The Board of Governors of the Federal Reserve System, after consultation with the Secretary of the Treasury, is authorized to use distributed ledger technology for the creation, distribution and recordation of all transactions involving digital Federal reserve notes,” the bill said. “The said notes shall be obligations of the United States and shall be considered legal tender and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues.”
Assault on anonymity
While the stablecoin provision is likely to be the most controversial, the bill also would require the Financial Crimes Enforcement Network (FinCEN) to draft regulations around anonymity-enhancing services for crypto.
“The purpose of the rule ... shall be to ensure that anonymizing services, money mule and anonymity-enhanced convertible virtual currencies are not used to prevent association of an individual customer with the movement of a digital asset, digital asset security or virtual currency of which the customer is the direct or beneficial owner,” the bill said.
This means that crypto exchanges or other entities would be prohibited from letting customers use mixers or similar services, which is likely to chafe privacy-conscious users.
While the bill does not explicitly define regulations for issues like DeFi, custody, wash trading, trading platforms or ransomware, it does direct various federal agencies to evaluate what regulation may look like and publish reports on their views.
The various agencies would have to include regulatory recommendations for Congress in these reports.
“DeFi, in general, is largely unaddressed by the bill but the hammer could ultimately drop, as the proposed legislation orders the Fed Reserve, SEC, [Office of the Comptroller of the Currency], CFTC and Treasury to submit a report summarizing DeFi in U.S. and (among other things) provide recommendations re[garding] appropriate DeFi regulation & investor protection, & various legal obligations [with regard to] DeFi hacks, fraud, & manipulation” Goldich said.
The bill also would shorten the CFTC’s “actual delivery” framework from four weeks to 24 hours, meaning an exchange would have to more-or-less immediately transfer control of an asset to a buyer after a transaction is conducted.
This transfer would either have to be recorded on the asset’s blockchain or on a trade repository registered with the CFTC.
This may pose a challenge for exchanges, because it gives them less time to ensure that a customer has full and sole control over any cryptos they’ve acquired than under the CFTC’s current guidance.
Beyer’s bill would also create an “optional” federal charter for crypto trading and clearing platforms. These chartered entities would be bound by the Bank Secrecy Act (BSA) and other laws, the bill said.
Much of the bill repeats details in different sections, addressing possible loopholes by amending multiple laws and directing several federal agencies to converge on regulations.
UPDATE (Aug. 3, 2021, 21:40 UTC): Updates with a brief statement from Beyer's office.