US lawmakers outline digital asset legislation principles

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On April 4, United States Chairman of the House Committee on Financial Services French Hill (R-AR) and Glenn Thompson (R-PA), Chairman of the House Committee on Agriculture, respectively, published an op-ed with their vision for digital asset market structure legislation.

The lawmakers outlined six core principles that they believe must be included in digital asset legislation, including providing clarity for the classification of assets, establishing the regulation of spot market exchanges and intermediaries, and instituting rules specific to decentralized entities.

The op-ed kicked off with a brief history of digital assets, going back to Satoshi Nakamoto’s 2008 Bitcoin white paper, after which the Republican congressmen indulged in a critique of digital asset policy under the Biden-Harris Administration, and bemoaned the Securities and Exchange Commission’s (SEC) failure to “clarify how existing securities laws apply” under former Chairman Gary Gensler.

“This lack of regulatory clarity stifled the digital asset ecosystem, pushing growth out of the United States to jurisdictions that have established clear rules of the road,” said the lawmakers.

To address these perceived failures, they added, “Congress began exploring ways to modernize the regulatory structure to accommodate the unique characteristics of digital assets and how they could be used in our financial system.”

To back this up, the op-ed pointed to a “historic joint effort to address digital asset regulation” launched in the 118th Congress by the House Committees on Financial Services and Agriculture. Specifically, the passage of the Financial Innovation and Technology for the 21st Century Act (FIT21).

FIT21 passed a full House vote 279-136 last May and, among other things, aims to clarify which government agencies will be responsible for overseeing specific tokens and digital asset platforms. FIT21 would significantly boost the oversight role of the Commodity Futures Trading Commission (CFTC) at the expense of the much-criticized—principally by Republicans—SEC.

The bill is now in the Senate, where it has been referred to the Committee on Banking, Housing, and Urban Affairs. This is as far as any significant digital asset-related legislation has made it in the U.S., and it must still survive Senate debates and amendments and get presidential approval, not a quick process.

Nevertheless, increased regulatory clarity is undoubtedly in everyone’s favor, and to build on the baby steps made by FIT21, Reps. Hill and Thompson decided to set out their principles for “balanced and iron-clad” digital asset legislation.

Six principles

The six principles range from general stances to dealing with specific issues or points of contention in the digital asset space.

First on the list was that “legislation must promote innovation.”

This is very much the Republican party line, favoring—as they have traditionally tended to do—innovation over consumer protection. The Congressmen said they would “seek to protect opportunities for innovators to create and utilize digital assets while ensuring users can lawfully transact with one another.”

The second principle was that “legislation must provide clarity for the classification of assets.”

A particular bugbear of Republicans and frequent point of contention with regulators has been how to classify digital assets, which is a broad category covering everything from memecoins, non-fungible tokens (NFTs), and utility tokens, to stablecoins and central bank digital currency (CBDC).

A myriad of factors may affect how one of these assets is viewed and classified, including how it is issued and who the issuer is, the governance of the blockchain, how it is advertised, and how its value changes. All these factors and more could determine whether it is a commodity or security under the law, and despite some making the persuasive case that almost all ‘cryptos’ are securities, there remains enough ambiguity to result in numerous contentious decisions and lawsuits.

For this reason, the second principle is key for lawmakers, who argue that “users of digital assets should clearly understand the nature of their holdings, including whether they qualify as securities or non-securities.”

Third, “legislation must codify a framework for the issuance of new digital assets.”

Fourth up was that “legislation must establish the regulation of spot market exchanges and intermediaries.”

The congressmen suggested that centralized, custodial exchanges and intermediaries that facilitate transactions with “non-security digital assets” should adhere to requirements similar to those of other financial firms.

“Congress should provide the Commodity Futures Trading Commission (CFTC) with the authority to impose requirements over these entities necessary to protect customers, limit conflicts of interest, ensure appropriate execution of customer orders, and provide disclosures,” said the lawmakers.

That those dealing in non-security assets are covered by the CFTC, with the same rules and requirements—or similar—as other assets, seems a fairly obvious and non-controversial point; the debate will come when determining which assets classify as ‘non-securities.’

Fifth, “the legislation must establish best practices for the protection of customer assets.”

Slightly breaking rank with the general ‘pro-business’ theme of the principles, in this more consumer protection-focused commitment, the Congressmen suggested that entities registered with the SEC or CFTC should be required to “segregate customer funds and hold them with qualified custodians.”

Furthermore, the lawmakers added that customer funds should be protected during bankruptcy.

Finally, the sixth principle was that “legislation must protect innovative decentralized projects and activities.”

Whether Reps. Hill and Thompson are fans of full-circle symmetry, wanted to double down on their main point, or simply ran out of ideas but thought six principles sounded better than five; the sixth and final point is essentially an expanded reiteration of their first, that legislation must promote innovation.

Adding a bit more detail, the lawmakers said, “Congress should ensure that decentralized protocols, which pose different risks and benefits, are not subject to regulations designed for centralized, custodial firms.”

A focus on safeguarding decentralized finance (DeFi) activities is a potentially important inclusion—even though protecting digital asset innovators, decentralized or otherwise, was arguably covered by their first principle—as decentralization, or pseudo-decentralization, is one unique characteristic of many blockchain and digital asset projects that have caused problems for regulators and lawmakers in the past, as well as for consumers, when something goes wrong.

Authorities and courts have increasingly found novel ways of dealing with the new challenges posed by ‘decentralized entities,’ including a U.S. ruling that institutional investors of a decentralized autonomous organization (DAO), Lido DAO, could be held liable for actions of the decentralized governing body; and the CFTC’s unconventional move to issue summons to Ooki DAO members through a help chat box.

It’s unclear, and not addressed in the op-ed, if Hill and Thompson had their minds on eliminating these routes to legal recourse so decentralized entities can innovate worry-free or if they hope to formalize such methods into law—however, based on the overall tenor of the principles, it’s fair to say probably not the latter.

As part of principle six, the Republican lawmakers added that “Congress must also protect an individual’s right to self-custody their digital assets.”

The op-ed concluded with a nod to crypto’s Commander in Chief, President Trump, as the Congressmen said they look forward to the House Financial Services and House Agriculture Committees continuing to work together to fulfill Trump’s goal of making the U.S. the “crypto capital of the planet.”

In May, the committees will host the second joint hearing to discuss digital asset market structure legislation.

Watch: Breaking down solutions to blockchain regulation hurdles