Four Bills That Will Define The Future Of Digital Assets
The dust is beginning to settle in the U.S. after the Securities and Exchange Commission (SEC) announced lawsuits against cryptocurrency exchanges Binance and Coinbase. We’re now left wondering, what happens next?
Regulatory clarity has been a recurring issue for the crypto and DeFi space, as some regulated entities remain concerned about the legal classification of crypto assets. But this may be changing.
The recent case between the SEC and Ripple Labs offered a glimmer of hope in the search for regulatory clarity. Ripple scored a partial victory in the case earlier in July when a U.S. District Court ruled that the sale of its XRP token on exchanges and through algorithms did not constitute investment contracts. However, the institutional sale of the tokens did violate federal securities laws, the court said.
Despite the still uncertain future, the news has sparked action within the institutional investment world. Established traditional finance players appear to be stepping into the breach, with BlackRock, Fidelity, Schwab and Citadel all recently announcing applications for exchange-traded funds in the crypto space.
Four bills that will shape the digital future
For institutional investors to fully embrace digital assets, clear regulation will be required. Since 2022, there have been at least 50 digital asset bills reportedly introduced to Congress, aiming to govern everything from stablecoins to the jurisdictions of U.S. regulators.
However, at least four of them are seen as potentially having a major impact on the industry if they pass into law.
Financial Innovation and Technology for the 21st Century Act
This bill, introduced on July 20, aims to create a solid process for determining if a digital asset is a commodity or security and would clarify the jurisdictions of regulators.
Introduced by Republican members of the Agriculture and Financial Services Committees of the United States House, the bill would give the Commodity Futures Trading Commission (CFTC) power over digital commodities and clarity on the SEC jurisdiction.
In other words, it would provide a process for crypto assets that have been labeled as securities to be re-labeled as commodities. Not only would this provide clear criteria for existing crypto projects to meet, it could usher in a wave of new innovation as start-ups would have clear regulatory frameworks to operate in.
Responsible Financial Innovation Act (RFIA)
A bill with a similar objective to the previous one is the Lummis-Gillibrand bill or RFIA for short. It aims to clarify the SEC and CFTC’s roles in crypto regulation. It also aims to give greater consumer protection by providing laws to prevent another FTX-style event from occurring.
Digital asset tax treatment clarity is also covered and the Federal Reserve would be ordered to process bank applications for master accounts from crypto firms on an equitable basis. To date, there are only a handful of crypto-friendly banks in the world, and many struggle to open an account at all so this element would be particularly welcome, providing a certain credibility to digital assets that is not currently considered by the banking system.
It would also see depository institutions be the only ones allowed to issue stablecoins, and would make room for decentralized autonomous organizations (DAOs) in the tax code and commission an advisory committee along with a slew of regular reports on the industry.
With no global agreement on the regulatory approach to DAOs, the downside of this policy is that DAOs may – very easily – seek a more favorable tax environment overseas. There are currently approximately 13,000 DAOs, holding around $23 billion, so while regulation is imperative to protect asset holders it is also a large, and growing, investment area which the U.S. might want to maintain some control over, by creating positive taxation policy.
Digital Asset Market Structure Bill (DAMS)
Introduced on June 1, DAMS is another bill aiming to define the crypto-related roles of the SEC and CFTC and set a framework for regulators to make determinations about whether certain or not cryptocurrencies are securities or commodities.
The bill is getting some attention. On June 26, Representative Maxine Waters sent letters to Treasury Secretary Janet Yellen and SEC chair Gary Gensler asking them to weigh in on the bill.
Under the proposed bill, a crypto token would have to undergo certification with the SEC to prove it is adequately decentralized before it can be given commodity status.
What’s more, crypto exchanges would be able to register with the SEC as an alternative trading system (ATS) and the regulator wouldn’t be able to deny registration due to a platform trading digital assets.
DAMS would clarify ATS rules and allow for digital commodities and stablecoins to be traded on ATS platforms. Moreover, the SEC would be required to allow broker-dealers to custody cryptocurrencies if they meet requirements.
Digital Commodity Exchange Act (DCEA)
First introduced in September 2020, an updated version of the DCEA was reintroduced in April 2022, adding that stablecoin providers could register as a ‘fixed-value digital commodity operator’ inclusive of recording and reporting requirements.
The DCEA hands the CFTC the power to register and regulate spot exchanges, which are brought under the same rules as other commodity exchanges. Cryptocurrencies that are not considered securities are labeled digital commodities under the CFTC’s purview and the SEC would police crypto securities offerings.
Crypto project developers could also voluntarily register with the CFTC by submitting disclosures required to publicly trade and list their assets on an exchange.
Where do we go from here?
Early indications suggest the response to the SEC’s aggressive actions could signal the beginning of a shift in attitudes to digital assets. What is now needed is clarity.
A tactical stalemate with the SEC seems to be the strategy for many within the crypto industry, as evident in Ripple’s victory. The objective is not necessarily to defeat the SEC’s current interpretation but to withstand its blows and work towards new, more favorable legislation. This approach, while contentious, may prove to be wise, considering the potential for U.S. congressional legislation to be much more agreeable than the SEC’s existing stance.
If the rest of the world follows, this will bring some much-needed reassurance to institutional investors.