Republican Officials Unveil Draft Law to Bring Regulatory Clarity to Cryptocurrency

By 0xK2 06/3/23 4:23 AM

Republican officials in the U.S. House of Representatives have unveiled a draft law aimed at providing much-needed clarity to the regulation of cryptocurrency assets. The draft, released on the 2nd, was co-authored by Financial Services Commission Chairman Patrick McHenry and Agriculture Commission Chairman Glenn Thompson, and it addresses several key aspects of cryptocurrency regulation.

Chairman McHenry expressed his enthusiasm for the draft, calling it “a first step toward bringing much-needed regulatory clarity to the digital asset ecosystem.” He emphasized the importance of constructive feedback on the proposed legislation. The draft begins by explaining its significance and purpose.

One of the primary objectives of the draft law is to establish clear guidelines for distinguishing between cryptocurrency tokens that are considered securities and those that are treated as commodities. The legislation provides a precise definition for determining when a token project has achieved sufficient decentralization to no longer qualify as an investment contract.

To achieve this, the draft sets out a certification process that cryptocurrency issuers must undergo to demonstrate to the Securities and Exchange Commission (SEC) that their networks are genuinely decentralized. According to the current draft, a network is deemed “decentralized” if it has been devoid of central control for at least one year, and no token issuer or organization owns more than 20% of the tokens.

Furthermore, the draft stipulates that the project must not have engaged in token marketing or issuance for a period of three months prior to certification as a decentralized network. In cases where tokens have been issued within the previous 12 months, they must have been exclusively distributed to end-users.

While the certification can be challenged by the SEC, the draft law requires the commission to provide detailed explanations for doing so. Additionally, if a project transitions from a decentralized to a centralized structure, the SEC reserves the right to revoke its decentralized designation.

The proposed legislation also addresses the registration of cryptocurrency trading platforms, allowing them to register as Alternative Trading Systems (ATS). It explicitly prohibits the SEC from rejecting platform registration based solely on their involvement with cryptocurrencies.

Notably, the draft exempts payment stablecoins from being classified as securities. To address stablecoins specifically, Congressman McHenry and other lawmakers are working on a separate bill. The draft further mandates collaboration between the SEC and the Commodity Futures Trading Commission (CFTC) regarding cryptocurrencies. It outlines the creation of a joint CFTC-SEC advisory committee on digital assets, comprising 20 market participants who will advise both commissions on matters concerning digital assets.

In a forward-looking approach, the draft also includes a provision that obliges the CFTC and SEC to conduct joint research on decentralized finance (DeFi). Additionally, it proposes that the two regulatory bodies develop a comprehensive regulatory framework for the cryptocurrency market while allowing businesses a transitional period to comply with the new regulations.

As the draft law on the regulation of crypto assets makes its way through the legislative process, stakeholders and industry participants eagerly await the outcome. Clarity and regulation in the cryptocurrency space have long been sought after, and this draft law represents a significant step forward in addressing the complexities of the digital asset ecosystem.