[co-author: Jake Rodon]
On April 28, bipartisan lawmakers in the U.S. House of Representatives introduced legislation, allowing the Commodity Futures Trading Commission (CFTC) to oversee cryptocurrency spot markets. The legislation intends to create a framework to fill the regulatory gaps between the CFTC and Securities and Exchange Commission (SEC) digital asset marketplace and related regimes.
According to bill co-sponsor Representative Ro Khanna (D-CA), “To foster American innovation and tech job growth, Congress must establish a clear process for creating and trading digital commodities that prioritizes consumer protections, transparency, and accountability. This bipartisan bill will create a regulatory framework for these emerging technologies and keep us competitive with the rest of the world.”
The Digital Commodity Exchange Act of 2022, H.R. 7614, (the Act) authorizes the CFTC to register and regulate digital commodity exchanges that offer spot or cash digital-commodity markets. Spot markets trade financial instruments, such as commodities, currencies, and securities, for immediate delivery. Under the Act, digital commodity exchanges that offer leveraged trading or list digital commodities for sale distributed to private individuals before being sold to the public would be required to register with the CFTC. Venues not offering these products may choose between CFTC registration and state money transmitter regimes.
The Act defines “digital commodity” as “any form of fungible intangible personal property that can be exclusively possessed and transferred person to person without necessary reliance on an intermediary.” The Act excludes traditional assets from the definition, such as an equity interest in a company or fund, and further excludes cryptocurrency representing ownership in a business.
The Act protects customers who utilize “stablecoins,” digital assets fixed at a price to another currency. A significant concern is that stablecoin operators do not hold the one dollar of cash in reserve per token issued as claimed. The Act tries to solve this issue by classifying stablecoins as “fixed-value digital commodities” and subjecting stablecoin operators to registration, reporting, and auditing requirements.
Registered digital commodity exchanges are subject to strict regulations, including monitoring trading activity, cybersecurity measures, setting minimal capital requirements, reporting requirements, and governance standards, among other requirements similar to those in the Commodity Exchange Act.
Act co-sponsor Representative Glenn Thompson (R-PA) said, “Closing the spot-market gap is an essential piece of the regulatory puzzle, but more work remains. I look forward to working with my colleagues to bring greater clarity to crypto users and creators and I hope to see it move through the legislative process promptly.”
Our Take. Passing the Act will provide greater clarity on how firms navigate digital asset trading, while also placing some regulatory oversight on the CFTC instead of the SEC. With a host of bills circling on virtual currency, as discussed here, it is a matter of time before Congress can come to some agreement on the oversight of virtual currencies and fill in the regulatory gaps.
