House again tackles regulation of cryptocurrencies
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Key leaders in the House of Representatives have taken a fresh stab at writing a comprehensive scheme to regulate cryptocurrencies in the U.S.
Why it matters: The question of which digital assets are subject to securities laws, and which aren't, has been a significant point of friction between the government and the industry since at least 2017, when entrepreneurs started raising money by issuing tokens en masse.
Driving the news: The Republican chairs of the House Financial Services and Agriculture committees, along with those of each ones' digital asset subcommittees, released a discussion draft of digital asset market structure legislation on Monday.
- The 212-page bill would define which tokens or coins fall under the jurisdictions of the CFTC and the SEC, and how a digital asset can graduate out of a more restricted SEC-oversight to becoming a digital commodity.
- It carves out payment stablecoins from the two categories, and deals with exchanges and trading of both kinds of assets. Case in point: Markets for secondary trading would all be subject to the Bank Secrecy Act.
Zoom in: It creates a path for issuing a digital asset, selling it and raising funds without it being defined as a security under the Securities Act of 1933.
- Groups issuing new digital assets that they intend to decentralize would have a process for progressively decentralizing a system.
- Teams that believe their blockchain system has matured — such that it's not under the control of any single entity — would be required to make a certification to the commission with various disclosures. The legislation then lays out a timeline where either the certification becomes effective, or the commission can engage in more consideration.
Context: Many digital assets are designed to pay a system — that no one controls — to do work for the system's users.
- In most cases, digital assets don't exist to confer legal rights to holders or generate yield, as traditional financial instruments do.
- But by having financial value, they create an incentive for a group of separate and individual people to operate a shared network that no one can manipulate.
The legislation ensures that no digital assets that function like swaps, futures or derivatives get a pass just for running on a blockchain. All those sorts of products are still subject to existing rules.
- It also distinguishes between using a digital asset and trading it. For example, if someone pays a blockchain network to function or to provide services, that's just using the asset as designed.
If a digital asset is determined not to be a security, that doesn't mean the trading of it won't be regulated.
- For example, the draft legislation defines a number of disclosures any new issuer has to make to regulators, continuing the tradition of a disclosure-based regime in the U.S.
- However it will mean that the asset's creators won't typically have to go through the same process as public companies do in order to issue a new digital coin to the public.
- And people won't have to be accredited investors to hold and use such coins.
In addition, the act provides for establishing the status of blockchain networks that launched before the act was passed.
- It protects developers and infrastructure providers from getting caught up in rules and regulations such that blockchain validators, developers of software for interacting with blockchains, and other incidental services are carved out from financial regulation.
- This has been an issue in the past, such as with the DeFi broker rule that Congress just rescinded.
The big picture: Existing U.S. securities laws were designed for familiar assets like stocks and bonds, but not so much for decentralized networks.
- The crypto industry has long argued for the U.S. to establish a new, top-to-bottom regulatory scheme that fostered innovation, while still providing needed investor protections.
- "America needs to be the powerhouse for digital asset investment and innovation. For that to happen, we need a commonsense regulatory regime," Rep. Dusty Johnson (R-S.D.), chair of the House Ag subcommittee that covers digital assets, said in a statement.
Flashback: The last time legislation started along these lines, it also started in the House.
- In the last congressional session, the so-called Fit21 bill made it out of the House but never moved in the Senate.
The bottom line: This is a very complex piece of legislation and there is going to be a lot of discussion here and a lot of changes.
What we're watching: Whether or not a joint hearing tomorrow on this topic even happens.
