CRYPTO BILL INTRODUCED BY MEMBERS OF THE SENATE COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
Legislation was introduced on August 3 to give the Commodity Futures Trading Commission (CFTC) authority to regulate digital commodities. This is a bipartisan bill spearheaded by U.S. Senators Debbie Stabenow (D-MI), Chairwoman of the Senate Committee on Agriculture, Nutrition, and Forestry, and John Boozman (R-AR), Ranking Member. Among other things, the bill would require all digital asset platforms, referred to as “digital commodity platforms” in the bill, to register with the CFTC. The focus of the bill is to increase investor protection in the digital asset markets and have consistent oversight over digital asset platform and trading.
WHAT DOES CRYPTO HAVE TO DO WITH THE COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY?
The CFTC is the agency responsible for regulating commodity markets. Commodities typically traded in these markets include traditional agricultural crops including wheat, corn, soybeans, and sugar as well as non-farm commodities like oil, gas, silver, gold, and financial instruments. The bill is implying that the majority of digital assets are commodities. From time to time, Congress reauthorizes the CFTC, which is the process used to update an agency’s authorities and recommended spending levels. Congress would need to approve the CFTC’s expanded authority to oversee certain digital assets as digital commodities.
INVESTOR PROTECTION
Investor protection is top of mind given recent activity in the digital asset space including the bankruptcies of crypto platforms Voyager and Celsius. The bill would subject these digital asset platforms to CFTC oversight, CFTC examinations, and require that the firm have adequate financial resources, disclose conflicts of interest, and abide by advertising standards which would include the disclosure of material risks. Additionally, the CFTC would be able to introduce rules related to margin and leverage. Hindsight is always 20/20 but it is reasonable to state that crypto platforms will have a higher level of investor protection under this bill compared to today’s requirements. Currently, crypto platforms are subject to AML requirements and various state requirements but are not held to the more burdensome requirements laid forth in this bill.
RISK MANAGEMENT
Digital commodity platforms are required under the bill to establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, including cybersecurity risk, through the development of appropriate controls and procedures, and automated systems. Digital commodity platforms would also be required to establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery.
NEW CATEGORIES OF CFTC REGISTRATION
Digital commodity platforms will need to register and identify as one of the following: digital commodity broker, digital commodity custodian, digital commodity dealer, digital commodity trading facility and similarly employees would have to register as associated persons of digital commodity brokers and digital commodity dealers.
CUSTODY
Digital commodity platforms would be required to segregate customer funds and treat and deal with all customer property that is received by the digital commodity platform as belonging to the customer. Platforms would also be prohibited from commingling customer property. Customer property would be required to be separately accounted for and cannot be commingled with the assets of the digital commodity platform.
HOW DOES THE SEC FACTOR INTO THIS BILL?
The bill recognizes that the other regulatory agencies such as the Securities and Exchange Commission (SEC) would have jurisdiction over such digital assets that function more like securities. The legislation also allows platforms and firms to dually register with both the CFTC and SEC.
HOW WILL THE CFTC BE FUNDED TO PROVIDE OVERSIGHT?
All digital commodity registered platforms would be required to provide the CFTC a user fee to cover the costs of registering digital commodity platforms, conduct oversight of digital commodity trades; and conduct education and outreach.
ASPECT ADVISORS COMMENTARY
We think another bipartisan bill focused on the oversight of the cryptocurrency market is positive and it shows that there is a meaningful effort being made to provide regulatory clarity to the cryptocurrency markets. This is preferable to a regulation by enforcement environment. However, we do believe that this legislation will also present challenges because a digital asset platform will likely have digital commodities, digital securities, and digital payments (i.e., stablecoins) all trading on the same platform. Therefore, the platform may end up being regulated by multiple regulatory agencies, which could increase the regulatory burden on firms. The other unknown factor is timing given that there is a long road ahead before this bill becomes law.