New digital asset bill establishes registration pathways for SEC, CFTC

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Yet another digital asset bill was introduced to the House on July 20: the Republican-backed Financial Innovation and Technology for the 21st Century Act.

The bill looks to formalize a regulatory pathway for digital asset exchanges to register with the Securities and Exchange Commission (SEC) under a regime that would allow them to list and trade digital securities, commodities, and stablecoins. It provides a separate pathway for digital commodity exchanges, brokers, and dealers to register with the Commodity Futures Trading Commission (CFTC).

Entities that file notices of intent to register via either route provide limited relief from enforcement action by the SEC until the commissions issue further rules regarding registration and compliance.

“After listening to members on both sides of the aisle, the Biden Administration, and stakeholders, the House Committees on Financial Services and Agriculture are introducing landmark legislation today to establish a functional regulatory framework that will protect consumers and keep innovation in the United States,” Rep. French Hill (R-AR) said.

“This legislation would not only have prevented FTX from stealing billions of customer funds, but also establishes robust consumer protections and clear rules of the road for market participants. I look forward to this historic legislation being considered in both the House Committees on Financial Services and Agriculture next week.”

The bill contains a raft of other provisions relating to all aspects of the digital asset industry. It defines ‘digital asset’ to mean “any fungible digital representation of value that can be exclusively possessed and transferred, person to person, without necessary reliance on an intermediary, and is recorded on a cryptographically secured public distributed ledger.”

A digital asset and commodity dealers are required to hold customer assets in a manner to minimize the risk to the consumer or the risk of unreasonable delay in allowing them access to those assets. To that end, the SEC would also be required to issue rules within 180 days of the bill’s enactment, which would set the standards that dealers must adhere to.

There are also provisions focused on the fostering of innovation within the industry. It would establish a Joint Advisory Committee on Digital Assets between the CFTC and the SEC. The committee would be composed of stakeholders in the digital asset marketplace and would provide recommendations to both agencies regarding the promulgation of new digital asset rules.

The release of the draft bill also comes with a heavily slanted ‘myth vs fact’ sheet jointly issued by the House Committee on Agriculture and the Financial Services Committee. It includes some myths and facts about the proposals themselves, such as “MYTH: Congress is fundamentally reshaping time-tested US securities and commodities laws to accommodate digital assets. FACT: Congress is tailoring very specific sections of US securities and commodities laws to ensure the SEC and CFTC have the authority needed to regulate the digital asset markets.”

It also includes relatively mundane observations like “FACT: Not all digital assets are securities. While some digital assets can be offered as part of an investment contract and some may be tokenized, a clear framework for determining when a digital asset is not a security is crucial.”

But then it contains more politicized assertions, such as “MYTH: digital assets facilitate financial crimes, such as money laundering. Legislation would legitimize a harmful industry.” Previous committee hearings on digital asset legislation have exposed some disagreement within Congress about whether regulating the industry separately is desirable or achievable.

The bill first came into life back in June, when Republicans Patrick McHenry (R-NC) and Glenn Thompson (R-PA) released a discussion draft of legislation aimed at providing clarity and filling regulatory gaps while balancing the need for innovation against the need for consumer protection.

The Financial Innovation and Technology for the 21st Century Act joins the ongoing stream of new digital asset law proposals coming out of Congress.

Earlier this week, senators Jack Reed, Mike Rounds, Mark Warner, and Mitt Romney introduced the Crypto-Asset National Security Enhancement and Enforcement Bill. The proposal targets digital asset-facilitated crime and sanctions evasion by subjecting DeFi services to the same requirements as apply to a traditional company.

Perhaps the most drastic step is the Bill’s provision that in the absence of an identifiable person in control of a DeFi company, any person who has invested more than $25 million will be responsible for the company’s compliance with laws and regulations.

As for the new Bill, both the Agriculture Committee and the Financial Services Committee are set to meet next week, where the proposals will inevitably be hashed out.

Watch: SEC Commissioner Hester Peirce on BSV Blockchain Association’s Blockchain Policy Matters