House Repubs Release Draft Crypto Legislation

A recent proposal from the Republican chairs of two House of Representatives committees would provide a way for crypto exchanges to register with the U.S. Securities and Exchange Commission (SEC), enabling them to trade digital securities, commodities, and stablecoins all on a single platform.

The House Financial Services Commission and Agriculture Committee have come up with a crypto oversight proposal that addresses many concerns of the digital assets sector. However, the draft bill released on Friday has not yet received Democratic support and still allows the SEC to decide which assets are securities, which would remain under their authority.

The “discussion draft” outlines criteria to determine whether a cryptocurrency or token should be classified as a commodity or security. Regulated crypto firms can argue that the assets are commodities but must provide a detailed explanation of how they operate and show proof that they’re decentralized. They must also certify that no one controls more than 20% of the assets. However, the SEC can dispute this classification if it provides a thorough analysis showing that the asset falls under its jurisdiction.

Certain crypto platforms may not need to categorize assets into different buckets. This is because an SEC-registered crypto exchange (also known as an Alternative Trading System) could enable trading in commodities and stablecoins as well. This would mean that investors could complete all of their crypto transactions on a single platform, as long as the platform is also registered with the U.S. Commodity Futures Trading Commission (CFTC).

The draft bill proposes a new type of registered business for the CFTC called a digital commodity exchange. This exchange would allow for the trading of certified crypto commodities and would be required to adhere to the agency’s standard protections, such as full separation of customers’ assets and protection against market manipulation. Additionally, the CFTC would have increased authority over the direct trading of crypto commodities, which was previously included in other bills considered by Congress last year.

The SEC and CFTC are currently involved in enforcing regulations against cryptocurrency companies, including leading trading platforms. The SEC has been moving towards limiting cryptocurrency’s connection to the traditional financial system (Chokepoint 2.0), while SEC Chair Gary Gensler claims that current securities laws are enough. However, the proposed legislation would force Gensler to update regulations specifically for cryptocurrency oversight.

However, this bill was only created through negotiations between Republicans and does not include input from Democrats yet and is considered a “discussion draft” to begin the conversation. The chairs are waiting for Democrats to create their own version, so both sides can work towards finding common ground.

Here are some of the key takeaways from the proposal:

• If token projects want to be treated as a commodity, they must undergo a certification process with the CFTC. This process will involve providing detailed information about their scope of operations.
• The legislation provides a safe harbor for existing crypto assets during the joint regulation process. This means that firms and investors can continue trading while awaiting the SEC and CFTC to establish new rules, which could take some time.
• It appears that the House Republicans are requesting for research to be conducted on decentralized finance (DeFi) and non-fungible tokens (NFTs), which indicates that any regulation pertaining to these aspects of the cryptocurrency industry may not be implemented immediately.

Currently, the legislation does not allocate any funds for the SEC and CFTC to handle the significant increase in workload or to hire more staff, especially at the commodities agency. The individuals who contributed to the bill determined that it would be more suitable to address the money issue during the usual congressional budgeting procedure.

Final Thoughts

The government seems to move incredibly slow when it comes to issues of freedom and autonomy and incredibly fast when it comes to stripping away freedoms. Unfortunately, that is just the world we live in. Crypto has been around for well over a decade, and they are just now getting around to drafting proposals. However, this is much better than the current ‘enforcement by litigation’ tactics currently being pursued by our lovely SEC. We will have to pay close attention to this bill and how it changes over time. Hopefully, the government will produce and pass a fair bill that allows crypto to flourish, innovate, and create wealth for generations to come.