U.S. House Republicans Push for Crypto Oversight With Bill to Make SEC Play Ball

U.S. House Republicans Push for Crypto Oversight With Bill to Make SEC Play Ball

  • Policy
  • June 3, 2023
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The draft legislation of key committee chairs is the most important proposal this year for the federal government to build guardrails around digital assets.

According to a proposal by the Republican chairs of two House of Representatives Committees that are trying to craft a bill, crypto exchanges will be able trade digital securities and commodities in one location.

The crypto-oversight proposal Congress came up with this year would tick a lot boxes that the digital assets industry is demanding. The draft bill, released by leaders of the House Financial Services Commission and Agriculture Committee on Friday, has not yet received Democratic support and is accompanied with caveats. These include the SEC’s continued power to determine what assets are securities and would remain under its authority.

The “discussion document” addresses the urgent question of how to distinguish between a commodity or a security. Any regulated crypto firm handling a cryptocurrency or token can argue that these assets are commodities. However, they must explain how they operate and demonstrate that they’re decentralized. They do this by certifying that no one is steering the project and that nobody controls more than 20 percent of assets. The SEC may challenge this claim if they can provide a “detailed assessment” that shows the asset is within its jurisdiction.

According to a proposal by the Republican chairs of two House of Representatives Committees trying to craft a bill, crypto exchanges will be able trade digital securities and commodities in one location.

The crypto-oversight proposal Congress came up with this year would tick a lot boxes that the digital assets industry is demanding. The draft bill, released by leaders of the House Financial Services Commission and Agriculture Committee on Friday, has not yet received Democratic support and is accompanied with caveats. These include the SEC’s continued power to determine what assets are securities and would remain under its authority.

The “discussion document” addresses the urgent question of how to distinguish between a commodity or a security. Any regulated crypto firm handling a cryptocurrency or token can argue that these assets are commodities. However, they must explain how they operate and demonstrate that they are truly decentralized. This is done by certifying that no one controls or steers the project. The SEC may challenge this claim if they can provide a “detailed assessment” that shows the asset is within its jurisdiction.

Some crypto platforms may not care about the buckets in which assets are placed, since they can also trade stablecoins, commodities and other cryptoassets. These platforms could potentially handle all of a cryptocurrency investor’s trades in one location, provided they are also registered with the U.S. Commodity Futures Trading Commission.

The draft bill for the CFTC would create a new registered business category: a digital commodities exchange where certified crypto-commodities would be traded. The agency would require that the new exchanges comply with its usual protections, including segregating customers’ assets and ensuring they are not susceptible to market manipulation. The agency would also have new authority to regulate direct trading in crypto commodities. This was also a part of other bills that Congress considered last year.

As U.S. supervision currently stands, the SEC, CFTC, and other agencies have waged a battle to enforce crypto laws, including against some of the biggest trading platforms. Any crypto-related rule efforts by the SEC are moving towards dramatically limiting crypto ties with the traditional financial systems. SEC Chair Gary Gensler claims that existing securities laws are adequate, but the legislation will force him to modernize the regulations for cryptocurrency-specific oversight.

This bill is a result of negotiations between Rep. Patrick McHenry, R-N.C., the chairperson of the financial committee, and Rep. Glenn “GT” Thompson, R-Pa., the chairperson of the agriculture panel. It does not yet reflect the input of their Democratic counterparts. According to senior policy staff who are familiar with the bill, it’s just a “discussion” draft meant to get the discussion started. The chairs hope that the Democrats will come up with a version of their own and both sides can find common ground.

Other key features of the proposal include:

  • Token projects that want to be treated as commodities will have to undergo a certification with the CFTC. This would require detailed disclosures of their operations.
  • The legislation states that while the agencies are working out the joint regulation, existing crypto assets will be exempt from enforcement action. This is a safe harbour that allows firms and investors to continue trading in the meantime.
  • Broker-dealers could also take custody of crypto-assets – a problem the agency is currently trying to resolve with its recently proposed rule that requires registered investment advisers to only hold their customers’ money in so-called qualified custodians.
  • House Republicans also call for studies on decentralized finance (DeFi), and non-fungible tokens (NFTs), suggesting that regulation of these parts of the crypto industry may be delayed.

The legislation does not include any appropriations at this time. This means that the SEC and CFTC will not receive a large sum of money to cover the huge increase in workload – or for the massive boost in staff likely needed by the commodities agency. People who worked on the legislation said it was better to leave money discussions to the regular budget process of Congress.

While the staffs of the Senate Banking Committee have been in contact with their counterparts, no one can be sure what Sen. Sherrod (D) Brown, the chairman, , wants to do in regards to crypto. Even if a compromise is reached in the House and a bill passes, the Senate must approve it. A crypto-critical Brown, who has been reticent about his legislative plans, will need to do so.

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