Crypto exchanges would gain a path to registering with the U.S. Securities and Exchange Commission (SEC) and would be able to trade digital securities, commodities and stablecoins all in one place under a proposal from the Republican chairs of the two House of Representatives committees trying to hash out a bill.
In the most significant crypto oversight proposal Congress has come up with this year, the proposed legislation would check a lot of boxes the digital assets sector is clamoring for. But the draft bill released Friday by the leaders of the House Financial Services Commission and Agriculture Committee hasn’t yet drawn Democratic support and comes with caveats, including the SEC’s ongoing power to determine which assets are securities that would remain under that agency’s authority.
On the most urgent question – how to tell what’s a commodity and what’s a security – the “discussion draft” says any of the regulated crypto firms handling a token or cryptocurrency can make a case that the assets are commodities, but they have to explain in detail how they work and prove that they’re truly decentralized by certifying nobody is steering the project or controls more than 20% of assets. And the SEC can challenge that claim if it can produce a “detailed analysis” demonstrating that the asset belongs in its jurisdiction.
For some crypto platforms, though, the designations of which bucket each asset fits into could become less important, because an SEC-registered crypto exchange – labeled as an alternative trading system (ATS) – would have the ability to set up trading in stablecoins and commodities, as well. So those platforms would potentially handle all of a crypto investor’s transactions in one place, as long as they also register with the U.S. Commodity Futures Trading Commission (CFTC).
For the CFTC, the draft bill would set up a new category of registered business: a digital commodity exchange, where certified crypto commodities would trade. The new exchanges would have to comply with the agency’s usual protections – including full segregation of customers’ assets – and ensure they’re not vulnerable to market manipulation. And the agency would have new authority over direct trading of crypto commodities, which had also been a feature of other bills considered by Congress last year.
As U.S. oversight currently stands, both the SEC and CFTC have been waging an enforcement battle against crypto companies, including some of the largest trading platforms, and any crypto-connected rule efforts at the SEC have moved toward dramatically restricting crypto ties to the traditional financial system. While SEC Chair Gary Gensler insists that the existing securities laws are sufficient, the legislation would force his hand into modernizing the regulations for crypto-specific oversight.
But as a product of negotiations between Rep. Patrick McHenry (R-N.C.), the chair of the financial panel, and Rep. Glenn “GT” Thompson (R-Pa.), the chair of the agriculture committee, this bill doesn’t yet represent the needed input from their Democratic counterparts. It’s a “discussion draft” meant to start the conversation, according to a senior policy staff familiar with the legislation, who said the chairs are hoping Democrats come up with their own version and the sides can start finding common ground.
Here are some of their proposal’s other key features:
- Token projects that are aiming for treatment as commodities would have to go through a certification process with the CFTC, which would include detailed disclosures about their operations.
- While the agencies work out the joint regulations, the legislation says that existing crypto assets would be free from enforcement actions – a safe harbor that would allow firms and investors to keep trading during what would be a potentially lengthy wait for the SEC and CFTC to finish setting up the industry’s new rules.
- Broker-dealers would also be able to take custody of crypto assets – an issue the agency is already trying to work out with its recent proposed rule to demand registered investment advisers only keep their customer money with so-called qualified custodians.
- The House Republicans are also calling for studies of decentralized finance (DeFi) and non-fungible tokens (NFTs), which suggests that regulation of those parts of the crypto economy may be pushed further down the road.
At this stage, the legislation doesn’t include any appropriations, meaning the SEC and CFTC aren’t given a new heap of cash for the tremendous increase in work – or the major boost in staff probably needed at the commodities agency. The people who worked on the bill said they decided it would be better to leave the money discussion to the regular congressional budget process.
And while the committees’ staffs have been in touch with counterparts in the Senate, nobody can say for sure what Sen. Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee, wants to do about crypto. Even if the House finds compromise and passes a bill, it still needs approval in the Senate, where a crypto-critical Brown has remained tight-lipped about his legislative plans.
The bill now becomes part of a much larger negotiation, not just with House Democrats and the Senate, but also over how it fits with the other major congressional crypto effort this year: the House Financial Services Committee’s dueling drafts of stablecoin bills, one from each party. Lawmakers from both sides have said that dealing with the oversight of stablecoins, which are typically dollar-pegged tokens that U.S. regulators have said could pose wider financial stability worries, could be the first crypto accomplishment from Congress.
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