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Proposed Digital Asset bill would weaken protections and open door to unregistered players: lobby letter

Twenty groups have written a letter to the U.S. House Financial Services and House Agriculture Committees, expressing opposition to the Digital Asset Market Structure Discussion (DAMS) Draft bill. The letter’s laundry list of concerns included that the proposed legislation would reduce the Securities and Exchange Commission’s (SEC) authority and provide a roadmap to unregistered offerings.

Signees of the letter range from industry and consumer groups to non-profit organizations that scrutinize government activity, including the American Economic Liberties Project, Strong Economy for All Coalition, the National Consumer Law Center, the Center for American Progress, and the Revolving Door Project.

The letter’s withering introduction sets the tone for the groups’ position on the bill: “Consumers have lost trillions due to the crypto collapse, in addition to the billions also lost directly to widespread scams, fraud, and theft found throughout the industry.”

The signees placed these failures squarely at the door of digital asset insiders, stating that “most of the industry’s wounds are self-inflicted and are a result of either failure to adhere to the most basic financial management principles, rampant fraud, or both.”

The letter went on to lament how a concentrated lobbying effort by the digital asset industry has led to the DAMS Draft bill—a “potentially radical proposal” that would weaken consumer and investor protections “in the name of crypto innovation.”

“It would also broadly reshape financial regulatory agencies’ jurisdictions and weaken regulatory oversight of financial products and services writ large,” wrote the concerned groups.

Breaking down the various issues with the bill, the letter highlighted eight key problems:

  • A rewrite of the SEC’s mission and mandate.
  • A blueprint for unregistered stock offerings.
  • A roadmap for traditional financial firms to use ‘decentralized networks‘ to evade more rigorous oversight.
  • A rubber-stamp certification scheme for digital asset’ commodities.’
  • A vague mandate for Commodity Futures Trading Commission (CFTC) that lacks clarity or sufficient investor and consumer protections.
  • An unfunded mandate for the CFTC, granting more responsibility with no new resources.
  • Weaker regulatory requirements for many digital asset securities.
  • An expansive temporary safe harbor that tacitly rewards non-compliance.

The first point was the most concerning and “most damaging” aspect of this bill for the groups, who fear that the DAMS would have the knock-on effect of changing how the SEC evaluates regulatory rulemakings for all securities markets, not just digital assets, by requiring the agency to evaluate new rules using innovation as a criteria, which the letter warned “is a dangerous approach.”

The groups emphasized in their critique that not all innovation is good and that incorporating it as a factor in developing new regulatory standards would change the SEC’s mandate to protect investors, promote fair markets, and facilitate capital formation.

“This provision would likely be weaponized (much like cost-benefit analyses are now) to hamstring SEC rulemaking processes and weaken the agency’s authority over all securities investors and markets,” warned the letter.

Among the other primary concerns, each given a paragraph explanation in the letter, was the idea that the bill would create a “blueprint for crypto asset issuers to effectively issue unregistered stock.”

The signees complained that by enacting a decentralized network definition that would allow digital asset issuers and traders to qualify as ‘decentralized‘ when certain conditions are met, they would then become exempt from meaningful securities regulatory oversight.

The letter concluded its scathing rebuttal of the DAMS by suggesting that instead of pursuing the “ill-advised proposal,” Congress’ efforts were better spent supporting regulators’ attempts to enforce existing rules, namely “the very basic elements of securities and banking regulation which provide the foundation for consumer and investor protections in the financial regulatory realm.”

Background of DAMS

On June 2, Patrick McHenry (R-NC), Chairman of the House Financial Services Committee, and Glenn “GT” Thompson (R-PA), Chairman of the House Committee on Agriculture, released the 162-page discussion draft for the proposed legislation, along with a section-by-section summary and a two-page summary, for those not excited about spending several hours trawling through the full version.

The introduction of the proposed legislation came in the wake of the FTX collapse and the crypto winter of 2022, which led to a crackdown by regulators, particularly the SEC. These events also highlighted how the U.S. is conspicuously lagging behind global peers in regulatory progress; the EU’s sweeping Markets in Crypto Assets Regulation passed its final European Parliament vote in April, and in the U.K., progress is being made towards integrating digital assets into financial regulation.

The DAMS would provide the first statutory framework for digital asset regulations in the U.S. and, according to McHenry and Thompson, would “provide clarity, fill regulatory gaps, and foster innovation while providing adequate consumer protections.”

Being the culmination of a joint effort between the House Financial Services Committee, which is responsible for overseeing the SEC and other financial regulatory agencies, and the House Committee on Agriculture, which is responsible for supervising the CFTC, it’s hoped the bill would at least solve the jurisdictional grey area that has existed between these two regulators when it comes to digital assets.

Key features of the bill

One of the most contentious issues in U.S. digital asset oversight is whether a digital asset is a security or a commodity. If a digital asset is a security, it needs to be registered with the SEC or otherwise meet certain exemptions to registration; if it is a commodity, it will be regulated by the CFTC and the Federal Trade Commission (FTC).

The proposed DAMS bill seeks to provide more clarity about which category a digital asset falls into by introducing an SEC exemption tailored to the initial sale of assets. This exemption provides a route for developers to build blockchain projects and raise funds using initial coin offerings (ICOs) while still providing investor protections in the form of disclosures and transferability restrictions.

However, it allows developers to eventually fall outside of the disclosure regime when the blockchain underlying the digital asset becomes “decentralized,” at which point the tokens would be presumed to be a commodity.

The DAMS bill also aims to clarify when a blockchain network is “decentralized” by defining what a decentralized network is in law. Criteria would include no single entity having unilateral control over the network, the issuer not having the power of more than 20% of the tokens, and all tokens issued in the past year being done through mining and consensus rewards.

The issues of decentralization and SEC exemptions were raised in the July 12 letter sent by the various concerned groups, who believed that the solutions proposed in the DAMS created more problems than they purport to solve.

Deliberations continue over the DAMS bill, which, apart from varied market and NGO opposition, does not have universal support on the Hill.

In a June 13 hearing of the Financial Services Committee titled “The Future of Digital Assets: Providing Clarity for the Digital Asset Ecosystem,” Rep. Maxine Waters (D-CA), the Financial Services committee’s ranking member, voiced concerns about the bill rewriting the country’s securities and commodities laws.

Waters made clear that Democrats would be looking at it carefully and suggested that existing securities laws already worked and should not be undermined.

“Any bill that would so dramatically overhaul our nation’s capital markets must be worked on collaboratively…we also need the analysis and views of our independent regulators, the administration, and the stakeholders on the implications of this legislation,” said Waters.

It’s fair to say that with Tuesday’s letter, the Committee has some more strong opinions on the implications of the bill with which to mull over.

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