The U.S. Senate released two new bills on Thursday, aiming to provide regulatory clarity on digital assets. The first, introduced by Congressman Tom Emmer (R-NC), is the “Securities Clarity Act,” which aims to establish cryptocurrencies that fall under securities. The other, “Digital Currency Exchanges Act 2020 (DCEA)” introduced by Representative Michael Conaway, aims to switch digital currency exchanges oversight from the SEC to its top commodities regulation.
Regulation of crypto exchanges to switch to CFTC
The Digital Currency Exchanges Act 2020, DCEA, introduced by Conaway, if passed, aims to put crypto exchanges in the U.S. under the oversight of a federal law, which will supplement the current state-by-state money transmitter licenses offered. The act aims to
“regulate the trading venues which list emerging digital commodities, such as Bitcoin, Ether, their forks, and other similar digital assets, for trading.”
Under the new law, digital currencies will be treated commodities and regulated under the Commodities Exchange Act with oversight provided by the Commodity Futures Trading Commission (CFTC). The Act by Conaway, co-signed by several members of the Congressional Blockchain Caucus, lays out a first-of-its-kind law that brings digital currencies under one federal law.
The core of the Act focuses on bringing together a federal law that allows DCE to acquire one federal license from the CFTC, streamlining the digital currency regulations across the U.S. Additionally; the bill looks into token issuances and custodial services for the DCE in a bid to reduce the barriers of developing on “innovative technology.”
According to a report on the proposed legislation, the exchanges will need to follow existing commodity market regulations to protect customers’ digital assets. It reads,
“DCEs would be required to segregate customer assets and hold them in separately regulated entities which are licensed to custody digital assets.”
In a blog post highlighting the two bipartisan bills introduced, Peter Van Valkenburg, director of research for the D.C.-based Coin Center, stated the new federal law would remove barriers to entry for most DCE. He explains that U.S. based exchanges under the new law will focus on a “preferable” single federal license instead of costly operations of gaining a license in each of the 49 states.
“If an exchange applied and were approved, then it would no longer be subject to state-by-state money transmission licensing requirements,” he said.
“Trading venues will be incentivized to choose CFTC regulation to reduce their regulatory burdens by facing only one regulator, be eligible to offer leveraged trading, and be the point of entry for new digital commodities to the retail public.”
Conway’s bill gives a flexible principle-based regulatory structure and core principles that an exchange must follow to gain approval. It is a source from the House of Agriculture Committee (Conway is a member) said. Further adding,
“The regulatory regime under the CEA works in large part because it creates a more flexible framework and lets regulated entities be more innovative.”
Moreover, the new law allows a flexible structure for exchanges that still wish to gain state money transmitter licenses. The bill reads in part,
“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 DCEA also highlights the need for “Quality Digital Commodity Custodians” regulated by the CFTC. The commission will head-up setting the minimum standards for a ‘qualified’ custodial entity.
Token issuance and manipulation
Apart from the CFTC assuming regulation control of digital asset exchanges, the DCEA also highlighted regulation on selling new digital commodities to retail customers. The bill will strike a balance between digital commodities and securities regulated by the SEC. Over the past few years, the SEC has taken up responsibility in regulating pre-sale agreements and the markets where they trade.
According to Valkenburgh, the new bill will ease the securities authority’s duties allowing the CFTC to “pick up the regulatory slack and supervising sales to the public” once the token launches on its public mainnet. He said,
“This should also help to better define the line between SEC 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.”
If passed, raising capital through token sales will still be governed by the SEC. Nevertheless, once the project launches and its token declared a commodity, the bill states:
“transactions involving that asset would be subject to the regulatory regime provided in the DCEA.”
The bill strikes a critical notice to the DCE that to gain the license and approval, they will need to list tokens that “are not readily susceptible to manipulation.” The bill further outlines the regulations set in place for DCE to safeguard customers’ assets on their trading platforms. The bill also highlights other issues that DCE should look out for, including capital requirements, customer fund protection, cybersecurity, public reporting requirements, governance standards, conflict of information reporting, etc.
The Securities Clarity Act
The second act, by Tom Emmer, the Securities Clarity Act, aims to “provide a path to regulatory certainty for digital assets and other emerging technologies under securities law.” Emmer, a member of the Digital Chamber of Commerce, aims to amend current laws to distinguish between a digital token and security to promote innovation in the blockchain space. According to the release by Emmer, this amendment will clarify that any asset sold as the object of an investment contract will not constitute security but an “investment contract asset.” Tom further stated,
“We have seen regulations hinder the progress of blockchain-based technologies. The development of these vital technologies should not be impacted by the government’s inability to adjust.
The Securities Clarity Act will allow America to compete in this new advancing space without sacrificing the consumer and investor protections that have made our capital markets the strongest in the world”.