GOP House Financial Services & Ag Committee chairs propose regs

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House Finan­cial Ser­vices Com­mit­tee Chair Patrick McHen­ry (R‑N.C.) and House Agri­cul­ture Com­mit­tee Chair Glenn Thomp­son (R‑Penn.) have unveiled a draft dis­cus­sion bill as a pos­si­ble frame­work to reg­u­late cryptocurrency.

The Repub­li­can pro­pos­al serves as a first step for leg­is­la­tion to reg­u­late cryp­to — and fol­lows six months of meet­ings with Repub­li­can mem­bers and staffers on the direc­tion for new rules, accord­ing to senior pol­i­cy staffers on the Finan­cial Ser­vices and Agri­cul­ture Com­mit­tees famil­iar with the draft­ing of the legislation.

Cryp­tocur­ren­cy is a dig­i­tal cur­ren­cy that acts like dig­i­tal cash; it allows any two peo­ple to send each oth­er mon­ey with­out a cen­tral bank or reg­u­lar bank. It doesn’t involve gov­ern­ments uphold­ing or main­tain­ing its val­ue. Its val­ue is large­ly derived from what­ev­er the next per­son is will­ing to pay for it as opposed to a stock, which is val­ued for the under­ly­ing company’s sales and profits.

No Democ­rats have been con­sult­ed for this first dis­cus­sion draft. So far Repub­li­can com­mit­tee lead­ers want to share the draft with oth­er Repub­li­can mem­bers and then have con­ver­sa­tions with House Finan­cial Ser­vices rank­ing mem­ber Max­ine Waters (D‑Calif.) and oth­er Democ­rats. Com­mit­tee aids are hope­ful that the con­cerns expressed by Democ­rats align with Repub­li­cans and are includ­ed in the draft.

The US Trea­sury and oth­er bank­ing agen­cies, includ­ing the SEC and CFTC, have been briefed on the direc­tion on big themes of the pro­posed regs but not any details.

“This dis­cus­sion draft is the first step toward deliv­er­ing on Repub­li­cans’ com­mit­ment to devel­op clear rules of the road for the dig­i­tal asset ecosys­tem,” said McHen­ry. “Our goal is to strike the appro­pri­ate bal­ance between con­sumer pro­tec­tion and encour­ag­ing respon­si­ble innovation.”

McHen­ry is also encour­ag­ing indus­try mem­bers to offer feed­back on the legislation.

Coin­base’s chief pol­i­cy offi­cer, Far­yar Shirzad, who had told Yahoo Finance there is no path to reg­is­ter­ing with the SEC, said in response to the new draft: “We wel­come Con­gress tak­ing steps to estab­lish a clear fed­er­al reg­u­la­to­ry frame­work for the reg­u­la­tion of cryp­to. We need to study the details of the pro­pos­al, but we agree with con­gres­sion­al lead­ers in both parties.”

The draft bill aims to cre­ate clar­i­ty around gaps between the rules of the Com­mod­i­ty Futures Trad­ing Com­mis­sion (CFTC) and the Secu­ri­ties and Exchange Com­mis­sion (SEC). It also tries to direct what firms need to do need to reg­is­ter with the SEC and requires the SEC to write new rules that are cus­tomized to gov­ern crypto.

So far, the SEC hasn’t writ­ten spe­cif­ic rules for cryp­to; it has only stat­ed that cur­rent secu­ri­ties laws apply to cryp­to. SEC Chair Gary Gensler has repeat­ed­ly asked cryp­to firms to reg­is­ter with the SEC and lev­eled more than a dozen enforce­ment actions against cryp­to firms for vio­lat­ing secu­ri­ties laws.

The bill tries to clar­i­fy a long out­stand­ing issue for the cryp­to com­mu­ni­ty — what cri­te­ria would cause a cryp­to token to be clas­si­fied as a com­mod­i­ty or as a secu­ri­ty. It pro­vides the CFTC with juris­dic­tion over dig­i­tal com­modi­ties and clar­i­fies the SEC’s juris­dic­tion over dig­i­tal assets offered as part of an invest­ment contract.

The bill pro­pos­es a “decen­tral­iza­tion” test to help deci­pher whether the token is a com­mod­i­ty, but that wouldn’t exclude it from nec­es­sar­i­ly becom­ing a secu­ri­ty depend­ing on how it’s used.

The so-called decen­tral­iza­tion test is about the blockchain net­work that the dig­i­tal asset oper­ates on. If the assets that run on the net­work are deemed as decen­tral­ized — mean­ing there’s no cen­tral author­i­ty and no inter­me­di­aries — then they would be treat­ed as a commodity.

Dig­i­tal asset issuers will need to demon­strate that their dig­i­tal assets oper­ate on a decen­tral­ized net­work and ful­fill cer­tain fit-for-pur­pose dis­clo­sure require­ments. From there, the bill leaves much up to the CFTC and SEC to fill in def­i­n­i­tions to offer more clar­i­ty for com­pli­ance with their rules.

The bill doesn’t des­ig­nate one agency over the oth­er as the main reg­u­la­tor, though it estab­lish­es a joint CFTC-SEC Advi­so­ry Com­mit­tee on Dig­i­tal Assets, which will include 20 mar­ket par­tic­i­pants, who will offer advice to the CFTC and SEC on how to reg­u­late crypto.

U.S. Capitol police stand outside the Capitol building as the Senate votes on debt ceiling legislation to avoid a historic default at the U.S. Capitol in Washington, U.S., June 1, 2023. REUTERS/Evelyn Hockstein

Cryp­to reg­u­la­tion at last? The U.S. Capi­tol (REUTERS/Evelyn Hockstein)

When it comes to decen­tral­ized finance, bill writ­ers want­ed to reserve space for Repub­li­can mem­bers on the House Finan­cial Ser­vices and Agri­cul­ture com­mit­tees to have a con­ver­sa­tion about those assets and how they want to treat them. Thus, the draft cre­at­ed a list of activ­i­ties that are relat­ed to the oper­a­tion of a blockchain net­work that are exclud­ed from reg­u­la­tion and reg­is­tra­tion — but still sub­ject to oversight.

Among oth­er actions in the bill, it impos­es cus­tomer pro­tec­tions for all firms required to be reg­is­tered with the SEC and CFTC. The leg­is­la­tion also tries to close gaps from sep­a­rate leg­is­la­tion to reg­u­late sta­ble­coins first cir­cu­lat­ed last Con­gress, includ­ing address­ing manip­u­la­tion, mar­ket struc­ture, and issues sur­round­ing when pay­ment sta­ble­coins are trad­ed on a plat­form. And it requires the SEC to mod­i­fy its rules to allow bro­ker-deal­ers to take cus­tody of dig­i­tal assets if they meet cer­tain requirements.

McHen­ry has repeat­ed­ly called for more clar­i­ty and rules and has crit­i­cized the SEC for refus­ing to pro­vide insight on whether cryp­to as part of an invest­ment con­tract is sub­ject to secu­ri­ties laws — and how cryp­tocur­ren­cy firms should com­ply with those laws.

“We have a mar­ket that lacks clar­i­ty and we have a duty to cre­ate reg­u­la­to­ry, a reg­u­la­to­ry envi­ron­ment that allows respon­si­ble inno­va­tion and respon­si­ble con­sumer pro­tec­tion to sit side by side with appro­pri­ate legal clar­i­ty,” McHen­ry said at a hear­ing last month before the House sub­com­mit­tee on dig­i­tal assets. “This ecosys­tem has been denied legal clar­i­ty for too long and both mar­ket par­tic­i­pants and con­sumers are worse off because of it.”

What’s next? There’s no for­mal time­line, accord­ing to com­mit­tee aides. Right now, the com­mit­tee chairs want to get feed­back from mem­bers and the indus­try — and update the draft until there’s a prod­uct that every­one can ral­ly around.

Jen­nifer Schon­berg­er has been a finan­cial jour­nal­ist for over 14 years cov­er­ing mar­kets, the econ­o­my and invest­ing. At Yahoo Finance she cov­ers the Fed­er­al Reserve, cryp­tocur­ren­cies, and the inter­sec­tion of busi­ness and politics. 

Click here for the lat­est cryp­to news, updates, val­ues, prices, and more relat­ed to Bit­coin, Ethereum, Doge­coin, DeFi and NFTs

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