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