On Friday, June 2, 2023, the House Committee on Financial Services and Agriculture released 162 pages of its discussion draft for a Digital Asset Market Structure bill.

The bill, which is led by Representatives Patrick McHenry (R-N.C.) and Glenn Thompson (R-Pa.), would add clarity to agency oversight and coordination for overseeing the digital asset industry. Rather than divide the crypto regulation between the CFTC and the SEC, the bill presents a detailed process for industry and government to do so.

The bill also attempts to fundamentally alter the definition of “bank,” per existing code. The bill includes the phrase, “or offering custody or safekeeping services,” laying the groundwork for greater crypto access to banks, and for even more banks to have their applications approved.

It remains to be seen whether the bill will be passed by the 118th Congress (2023-2024). However, it represents a significant step forward in the effort to bring more clarity and regulation to the digital asset industry.

“It’s very rare to see two Chairs collaborate like this. In fact, it basically only happens for very marquee legislation. Usually, when a topic crosses into the jurisdiction of multiple committees, each committee works on their own topic and the text is then combined.” — Justin Slaughter

To help you understand this bill, its authors have provided a summary HERE.

The bill has been met with mixed reactions. Some have praised the bill for providing much-needed clarity and regulation, while others have criticized it for being too restrictive.

The bill would:

• Require the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to jointly regulate digital asset exchanges and other market participants.
• Allow digital asset exchanges to register with the SEC or the CFTC, whichever is more appropriate.
• Require digital asset exchanges to comply with certain customer protection requirements, such as providing accurate information to investors and protecting customer funds.
• Give the SEC and the CFTC authority to investigate and prosecute fraud and manipulation in the digital asset market.

A detailed look at the bill’s provisions:

Joint Regulation: The bill would require the SEC and the CFTC to jointly regulate digital asset exchanges and other market participants. This would ensure that there is a single set of rules for the industry and that no one agency has too much power.

Registration: The bill would allow digital asset exchanges to register with the SEC or the CFTC, whichever is more appropriate. This would give exchanges the opportunity to choose the regulator that they believe is best suited to oversee their activities.

Customer Protection: The bill would require digital asset exchanges to comply with certain customer protection requirements, such as providing accurate information to investors and protecting customer funds. This would help to prevent fraud and ensure that investors are treated fairly.

Enforcement: The bill would give the SEC and the CFTC authority to investigate and prosecute fraud and manipulation in the digital asset market. This would help to deter bad actors and protect investors.

Key Takeaways:

• The definition for digital asset covers “fungible digital representations; avoiding non-fungible digital assets (NFTs)

• The bill gives the CFTC “exclusive jurisdiction” over any account or transaction “involving a contract of sale of a digital commodity in interstate commerce, including in a digital commodity cash or spot market.” The CFTC has had regulatory oversight authority over futures contracts on commodities since the 1970s, yet the CFTC has never had regulatory authority over crypto assets and activities provided by existing law; this bill gives them authority.

• Digital asset issuers can be any person that either:

• The bill protects companies granting tokens to a network from getting ensnared in the wider net of securities laws. This may also apply to airdrops, which may facilitate wider use and adoption in the U.S.

• Payment stablecoins are considered a digital asset. Many tokens will qualify as digital commodities and subject to CFTC laws and regulations rather than SEC laws and regulations if they are part of a decentralized network.

• Restricted digital assets are those purchased directly from an issuer, distributed to insiders via an end user distribution, or distributed “to any other person” through any other transaction.

• Segregation of customer funds is required; commingling of customer funds is prohibited, although there are exceptions for banks and custodians. Commingling is allowed if it is “separately accounted for.” Customer money must be held in a manner to “minimize the risk of loss.”

• Disclosures must be made to potential purchasers.

TAKING IT TO THE HOUSE:

As-is, this is a GOP bill that is still in the discussion draft stage and has not yet been introduced. It may pass the House, yet it will need Democratic support (likely 50-100 Democratic House Members) to have a chance of becoming law.