Legislators Introduce Bills to Address Confusion Regarding the Governance of Digital Assets - 09 October 2020

The Digital Commodity Exchange Act and the Securities Clarity Act are intended to clarify when and how securities laws and commodities regulations apply to digital assets, according to sponsors.

Congressman David Schweikert (R-Ariz) has introduced the Digital Commodity Exchange Act of 2020 (DCEA) to create a single, opt-in national regulatory framework for digital commodity trading platforms under the CFTC jurisdiction. Separately, Tom Emmer (R-Minn) has introduced legislation to provide clarity for digital assets under the federal securities laws, specifically to exclude "investment contract assets" from the definition of a "security."

"We must ensure our laws and regulations are clear to give digital markets the clarity needed to protect consumers while ensuring further innovation can take place. This bill is a great step in the right direction for continuing to update and future-proof our federal policy," Schweikert said.

House Agriculture Committee Ranking Member K. Michael Conaway sponsored the bill, noting that the DCEA provides a forward path. "Digital commodity trading platforms are currently required to comply with a complicated labyrinth of 53 state and territory regulatory frameworks, hindering the ability for newcomers to enter the market," he said. Coin Center Executive Director Jerry Brito noted that the bill is a "win-win" for innovators and investors.

DCEA. According to cosponsors, the DCEA was crafted to fill in the regulatory gaps between the CFTC and SEC in digital asset markets and create a framework to regulate trading venues that list emerging digital commodities for public trading without sacrificing protections for retail investors.

Specifically, the DCEA builds on the existing commodity markets framework and provides authority for the CFTC to register and regulate Digital Commodity Exchanges (DCEs) as a new type of registered entity with requirements that parallel those applicable to existing intermediaries, such as designated contract markets and swap execution facilities. DCEs would be required to comply with regulations regarding trade monitoring, abusive trading prohibitions, minimum capital requirements, public reporting, and conflicts of interest. Exchanges also would be subject to limitations on which digital commodities they could offer for trading. DCEs also would be required to segregate customer assets and hold them in separately regulated entities licensed to custody digital assets; registered DCEs would need to hold customer digital commodity assets with a registered "Qualified Digital Commodity Custodian."

Participants in digital commodity presales would be subject to the new trading restrictions on assets received through a presale until a registered digital commodity exchange lists the asset for trading and the asset is sold.

The registration regime would be voluntary (but with incentives) and would preempt the existing state-based, money-transmitter-licensing regimes to which trading venues are currently subject.

Securities Clarity Act. Legislation sponsored by Rep. Emmer, Ranking Member of the House Financial Services Committee’s Task Force on Financial Technology, would provide regulatory clarity for the launch of an open blockchain network and clarify that an investment contract asset, or digital token, is separate and distinct from a related securities offering. The bill would allow companies that have complied with current securities registration requirements to provide distributed assets to the public without fear of uncertainty. Specifically, the bill seeks to clarify the status of any asset sold as the object of an "investment contract" by proposing a new definition, "investment contract asset." The new term would refer to any asset sold as part of an investment contract that would not be considered a "security" but for sale as part of an investment contract.

"We have seen regulations hinder the progress of blockchain-based technologies. The development of these vital technologies should not be impacted by government’s inability to adjust," said Rep. Emmer.

"Together, these efforts will help clarify outstanding issues related to when and how securities laws and commodities regulations apply to digital assets. Uncertainty over the application of these rules of the road continues to act as a strong headwind for the crypto ecosystem," Blockchain Association Director Kristin Smith concluded.

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