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Crypto exchanges would be granted the opportunity to officially register with the U.S. Securities and Exchange Commission (SEC), enabling them to facilitate the trading of digital securities, commodities, and stablecoins, all within a unified platform. This proposal has been put forth by the Republican chairs of the two House of Representatives committees involved in drafting the bill, aiming to streamline and consolidate the regulatory framework for the crypto industry.

The latest crypto regulation proposal presented by Congress addresses several key concerns raised by the digital assets sector, making it a highly significant development this year. However, the draft bill, released by the leaders of the House Financial Services Commission and Agriculture Committee on Friday, still awaits support from Democratic lawmakers and includes certain conditions. Notably, the Securities and Exchange Commission (SEC) will retain its authority to determine the classification of assets as securities, maintaining its ongoing power in this regard.

In regards to the pressing matter of distinguishing between commodities and securities, the "discussion draft" states that any regulated cryptocurrency firms engaged in the handling of tokens or cryptocurrencies can argue that these assets should be classified as commodities. However, they must provide a comprehensive explanation of their functionality and demonstrate their true decentralization by certifying that no entity oversees the project or controls more than 20% of the assets. The Securities and Exchange Commission (SEC) retains the authority to challenge this assertion by producing a thorough analysis that substantiates the asset's inclusion within its jurisdiction.

However, for certain crypto platforms, the categorization of assets into specific buckets may become less significant. This is because a crypto exchange that is registered with the Securities and Exchange Commission (SEC) as an alternative trading system (ATS) would have the capability to facilitate trading not only in securities but also in stablecoins and commodities. Consequently, these platforms would potentially offer the convenience of handling all cryptocurrency transactions for investors in a single location, provided that they also register with the U.S. Commodity Futures Trading Commission (CFTC).

The draft bill proposes the establishment of a digital commodity exchange, which would introduce a new category of registered businesses. This exchange would specifically focus on the trading of certified crypto commodities. To ensure the security and integrity of these exchanges, they would be required to adhere to the standard safeguards set by the CFTC, such as the complete segregation of customers' assets, and implement measures to prevent market manipulation. Additionally, the bill grants the CFTC newfound authority over the direct trading of crypto commodities, a provision that had been present in other bills considered by Congress in the previous year.

In the current state of U.S. regulatory oversight, both the SEC and CFTC have been actively enforcing regulations against cryptocurrency companies, including prominent trading platforms. Furthermore, any attempts by the SEC to introduce rules related to cryptocurrencies have leaned towards significantly limiting their integration with the traditional financial system. Despite SEC Chair Gary Gensler's belief that existing securities laws are adequate, this legislation would compel him to update the regulations to accommodate specific oversight of the crypto industry.

However, this bill, which is the result of negotiations between Rep. Patrick McHenry (R-N.C.), the chair of the financial panel, and Rep. Glenn "GT" Thompson (R-Pa.), does not currently incorporate the necessary input from their Democratic counterparts. It is considered a "discussion draft" designed to initiate dialogue, as per a senior policy staff member familiar with the legislation. The chairs are hopeful that Democrats will propose their own version of the bill, allowing both sides to work towards identifying areas of agreement.

Below are some additional noteworthy elements of their proposal:

  • Token projects seeking to be recognized as commodities would be required to undergo a rigorous certification procedure overseen by the Commodity Futures Trading Commission (CFTC). This process would entail comprehensive disclosures regarding their operational activities.
  • As the agencies collaborate on developing unified regulations, the legislation ensures that current crypto assets will not face any enforcement actions. This safe harbor provision enables companies and investors to continue trading during the potentially lengthy period while the SEC and CFTC establish the industry's new rules.
  • In addition, broker-dealers would have the ability to hold custody of crypto assets, a matter that the agency is currently addressing through its proposed rule to require registered investment advisers to exclusively entrust customer funds to qualified custodians.
  • The House Republicans are further advocating for comprehensive examinations of decentralized finance (DeFi) and non-fungible tokens (NFTs). This indicates that the regulation of these specific aspects within the crypto economy might be deferred to a later stage.

At present, the legislation does not allocate any funding, which implies that the SEC and CFTC will not receive additional financial resources to cope with the significant surge in workload or the potential requirement for a substantial increase in staff at the commodities agency. According to individuals involved in crafting the bill, it was determined that it would be more appropriate to address the financial aspect through the regular congressional budget process.

Despite the communication between the committees' staff and their Senate counterparts, the intentions of Senator Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee, regarding cryptocurrency remain uncertain. Even if the House manages to reach a compromise and pass a bill, it still requires approval in the Senate, where Senator Brown, known for his skepticism towards crypto, has kept his legislative plans undisclosed.

The bill has now entered a broader negotiation phase involving not only House Democrats and the Senate but also the House Financial Services Committee's contrasting versions of stablecoin bills, one from each political party. Lawmakers from both sides have acknowledged that addressing the regulatory oversight of stablecoins, which are usually digital tokens pegged to the US dollar and have raised concerns about potential risks to financial stability according to US regulators, could be the initial significant legislative achievement in the realm of cryptocurrencies by Congress.