Rationality in the Federal Oversight of Digital Assets? It’s Possible Say Members of Two House Committees Proposing New Legislative Framework

A framework for a potential bill that would provide (1) the Commodity Futures Trading Commission exclusive jurisdiction over digital commodity transactions occurring on or with three new types of registrants and (2) an express process for digital assets to be classified as digital commodities (and thus not securities), was proposed by members of the House Financial Services Committee and House Committee on Agriculture on June 2, 2023.

The framework would also preserve Securities and Exchange Commission (SEC) jurisdiction over digital assets that are securities.

Under the framework, digital commodities are defined generally as digital assets other than stablecoins that were issued to any person through an end user distribution or held by a person after each network to which the digital asset relates is a functional network that has been certified to the SEC as being decentralized and not rejected by the SEC. 

Any person may seek to certify to the SEC that a network is decentralized by providing a formal certification that includes information about the person making the certification and an analysis of factors on which the certification is based. The network would be automatically considered decentralized 30 days after filing, unless, the SEC stays the certification for up to 90 days. Thereafter, the framework provides alternative ways the certification would be deemed effective or could be rejected by the SEC, with rights of court appeal granted to an aggrieved filer.

The framework authorizes three new categories of CFTC registrants to participate in transactions related to digital commodities: digital commodity brokers (DCBs), digital commodity dealers (DCDs) and digital commodity exchanges (DCEs). Certain types of existing CFTC registrants could also register as DCBs, DCDs or DCEs, and persons could register in multiple categories of the new types of digital commodity registrants depending on their type of business. Relevant CFTC registrants could also register with the SEC to permit trading of both digital commodities and digital securities within the same entity. 

As proposed, all digital commodity registrants are required to hold customers’ digital commodities with a qualified digital commodity custodian and segregate customers’ assets generally from the digital commodity registrant’s own assets. DCEs are subject to core principles parallel to those for designated contract markets and swap execution facilities, and all digital commodity registrants must comply with minimum capital requirements and employ a chief compliance officer who would have enumerated obligations, among other requirements.

The framework provides a process for both a potential digital commodity registrant to file a provisional registration statement with the CFTC and a broker-dealer and an alternative trading system (ATS) to file the same with the SEC. This filing, subject to conditions, would enable such entities to engage in relevant businesses while waiting for formal registration approval.

Under the framework, the SEC would not be able to preclude a trading platform from qualifying as an ATS solely because it proposes to offer digital assets for trading.

According to Glenn Thompson, Chairman of the House Committee on Agriculture, “[t]his historic joint effort with the House Committee on Financial Service[s] aims to close existing authority gaps between the CFTC and SEC and bolster U.S. leadership in financial and technological innovation.” Dusty Johnson, Chairman of the Subcommittee on Commodity Markets, Digital Assets and Rural Development echoed Chairman Thompson’s stated when he additionally noted, “[t]here is a lot of confusion surrounding digital assets. Our bill establishes a functional framework to fill the gaps in the regulatory process between the CFTC and the SEC.”

Click here for a summary of the proposed framework.

Click here for the full framework.