March 17, 2020
by Katherine Cooper

            On March 9, 2020, Congressman Paul A. Gosar, R-AZ, introduced H.R. 6154 entitled the “Crypto-Currency Act of 2020.”  The bill’s preamble explains that it is a bill to

clarify which Federal agencies regulate digital assets, to require those agencies to notify the public of any Federal licences [sic], certifications or registrations required to create or trade in such assets, and for other purposes.

H.R. 6154 has been referred to both the House Financial Services Committee and the House Agricultural Committee.

            The thrust of the proposed legislation is to assign primary authority over three different kinds of digital assets to specific, existing Federal agencies.  The three different kinds of digital assets set forth in the bill are “Crypto-Commodities,” “Crypto-Currencies” and “Crypto-Securities.”  It defines “crypto-commodity” to mean

Economic goods or services, including derivatives, that—

(A) have full or substantial fungibility;

(B) the markets treat with no regard as to who produced the goods or services; and

(C) rest on a blockchain or decentralized cryptographic ledger.[1]

The legislation defines “crypto-currency” to mean “representations of United States currency or synthetic derivatives resting on a blockchain or decentralized cryptographic ledger.”[2]  Finally, the bill defines “crypto-security” to mean “all debt and equity that rest on a blockchain or decentralized cryptographic ledger.”[3]  It excepts from the definition of “crypto-security,” however, a “synthetic derivative that— (i) is operated as and is registered as a money services business . . . and (ii) is operated in compliance with [the Bank Secrecy Act and other anti-money laundering requirements].”[4]

            The bill designates the Commodity Futures Trading Commission (“CFTC”) as the primary Government agency with authority to regulate crypto-commodities.  It names the Secretary of the Treasury “acting through” the Financial Crimes Enforcement Network (“FinCEN”) and the Office of the Comptroller of the Currency (“OCC”) as the primary Government agencies with the authority to regulate crypto-currencies other than synthetic stablecoins.[5]  Finally, it charges the Securities and Exchange Commission (“SEC”) with being the primary Government agency with the authority to regulate crypto-securities and synthetic stablecoins.

            Although any and all additional clarity offered to the marketplace for digital assets would no doubt be welcome, H.R. 6154 may do more harm than good.  First, the bill’s definition of “crypto-commodity” runs roughshod over nearly half a century of law and practice regarding what is subject to the CFTC’s jurisdiction and what is not.  The name of the agency is, after all the Commodity Futures Trading Commission – not the Commodity Trading Commission.  The definition of the term “commodity” in the Commodity Exchange Act (“CEA”) is, in relevant part, all goods or services on which futures contracts trade.[6]  The bill would give the CFTC authority to regulate cash crypto-commodity markets but not any other cash commodity market.  It is unclear why or how the cash crypto-commodity markets warrant this level of federal oversight when other cash markets – such the cash agricultural markets which produce the food we eat, the cash energy markets which provide us with the energy to light and heat our homes, and the cash interest rate markets which determine how much we pay in mortgage interest or what the banks pay us for our deposits – are not overseen by the CFTC.

            Moreover, the legislation does not give the CFTC, FinCEN, OCC and SEC any substantive guidance over how to regulate the digital assets that it assigns to each agency.  For example, although the bill directs the CFTC to register cash crypto-commodity markets, it offers no, even high level, grounds on which it should register such exchanges.  The current CEA, for example, sets forth 23 Core Principles that the CFTC must use in designating and regulating futures exchanges.  With respect to what the bill calls “crypto-securities,” it does not address the most pressing questions facing the marketplace: what is and what is not a “crypto-security” and if something is, how the SEC should regulate it in contrast to traditional securities products.

            It is not clear that the determination of which agency has primary authority over a particular digital asset has been a principal concern.  Digital assets that have attributes of securities have been subject to SEC enforcement authority, and digital assets with futures contracts trading on them have been subject to CFTC regulation.  Digital assets have been subject to the Bank Secrecy Act and anti-money laundering and anti-terrorist financing regulations.[7]  What would be helpful is legislation that provides clarity around when is a digital asset a “security” and most urgently when is a stablecoin not a “security.”  The lack of clarity whether a stablecoin is a “security” is a severe impediment to distributed ledger technology realizing its promise to revolutionize the payments industry.

            As getting legislation through Congress is hard enough in the best of times, it might be a better idea to craft legislation on a very focused issue.  One suggestion is expanding the exception to the automatic stay in bankruptcy to treat digital asset brokers and dealers the same way the Bankruptcy Code applies to “stockbrokers,” “commodity brokers” and “forward contract merchants.”[8]  That would give such brokers and dealers better control over what the risk of a customer’s bankruptcy represents to the broker or dealer and better insulate the firm’s other customers from another customer’s bankruptcy.  If it is truly the sense of Congress that the digital asset marketplace warrants federal protections, the Bankruptcy Code might be a focused, bite-sized place to start.

 

[1] H.R. 6154 § 2(1).

[2] Id. § 2(2).

[3] Id. § 2(3)(A).

[4] Id. § 3(3)(B).

[5] Id. § 3(b).

[6] 7 U.S.C. § 1a(9).

[7] See, e.g., FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (FinCEN March 18, 2013).

[8] 11 U.S.C. § 362(b)(6).

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