Digital Asset Market Structure Proposal From House; CFTC Advising On Risk

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market structure – the draft

It’s a BIG bill.

Please meet the “Digital Asset Market Structure Proposal” – a 162-page discussion draft of a bill intended to provide “a statutory framework for digital asset regulation intended to provide clarity, fill regulatory gaps, and foster innovation, while providing adequate consumer protections,” according to the release.

See the 162-page discussion draft (PDF).

Notably, the bill combines the efforts of House members and the staffs of the Agriculture and Financial Services (HFS) Committees led by Chairs Glenn “GT” Thompson (R, PA) and Patrick McHenry (R, NC), respectively.

On Friday, Chair McHenry tweeted his thanks across both committees including the related, digital asset subcommittee chairs Rep. Dusty Johnson (R, SD)  and Rep. French Hill (R, AR) adding, “I encourage the public to provide constructive feedback to help us get this right.”

market structure – law?

Judging from the crypto Twitter legal community, this bill is suitably dense and will effect a demonstrable change in the U.S. financial system – if adopted – by defining the market structure for digital assets.

Cutting to the chase…. Will it become law anytime soon?

Alexander Grieve of government relations firm Tiger Hill tweeted a near-term schedule for the bill explaining that “the committees will ‘mark up’ (i.e. live-edit/offer amendments) the legislation in early July; House floor vote potentially some time in late July or Sept…”

Amidst the bill’s challenging road ahead, the two Chairs want input. House Democrats have not been given an opportunity to react to this bill yet, which could, maybe, help create support in the Democratically-controlled Senate.

On that note, Rep. Warren Davidson (R, OH) shared with Politico last week his thoughts on potential Democratic collaboration:  “Once we share that text, then we’ll really have a sense for where everyone is on it. (…) We might nail it and be like, ‘Pretty good.’ We might be like, ‘Oh, wow, this is going to take a while.'”

The way things look in the Senate and within the Biden Administration today the road ahead seems difficult, if not impossible. Of course, the shifting sands of politics led by the electorate could change everything. Or, how about an upswing in crypto prices and the power of “number go up”?

Bottom line: the work being done in this bill needs to be done at some point. It’s a step forward even if a law is down the road.

market structure – reaction

Paradigm’s policy pro Justin Slaughter breaks down the bill in a detailed tweet thread that’s nearly as long as the bill itself (no joke!). It begins here.

Slaughter suggests the “section-by-section rundown of the bill’s contents” and the draft’s summary as the best way to review the overall scope of the bill.

Then, he rolls out his analysis beginning with definitions in the bill: “Right off the bat, the bill has a boatload of them, including ‘blockchain’ itself. Note that this will only fit those technologies with ‘publicly available’ source code. So this could be an issue for ‘permissioned’ chains.”

Offering his take, Coinbase Chief Policy Officer Faryar Shirzad tweeted, “The bill takes on some key issues, including clarity on what’s a digital asset commodity vs a security, providing a pathway for companies to register, enhancing consumer protection and creating a federal regulatory regime at the [Commodity Futures Trading Commission (CFTC)] for the spot trading of crypto commodities.”

Venture investment firm Haun Ventures via its Twitter account that the new legislation is significant beginning with…: “Around the world, [governments] are developing new regulatory frameworks.” Read more.

Blockchain Association’s director of government relations Ron Hammond tweeted, “The next two months will be the busiest it has ever been for crypto legislation. Buckle up. This draft is a start and likely will change as it moves through the political process.”

Digital Chamber’s VP of policy Cody Carbone tweeted several highlights in the bill including: “Classification: [digital assets] can be classified as a security or commodity. A disclosure regime is introduced and allows for evolution of assets e.g., An asset can go from security to commodity if it operates on a decentralized network.”

American Dollar

In an op-ed in American Banker, founder and CEO of Chamber of Progress Adam Kovacevich writes, “It’s true that we stand to lose a lot if the U.S. allows our consumers to be harmed by fraudulent or irresponsible crypto institutions. But that is exactly why we should want them to stay stateside.” His reasoning begins with the American dollar. Read it.

Timing is everything: this Wednesday’s House Financial Services Committee meeting aims to provide more on the preservation of the Dollar as the world’s reserve currency. See the landing page.

commodities rule

The Commodity Futures Trading Commission (CFTC) issued a heads-up last Thursday that it would be “seeking public comment on potential amendments to the Risk Management Program (RMP) requirements in CFTC Regulations 23.600 and 1.11 (collectively, RMP Regulations) applicable to swap dealers and futures commission merchants. Read the brief statement. Though not mentioning digital assets explicitly, its overall focus struck a “digital asset” tone with at least one commission member, maybe two.

commodities rule – Commissioners

Commissioner Christy Goldsmith Romero followed up the CFTC news with a statement of her own which reflected her own interest in the January bank regulator (i.e. prudential regulators) crypto warning to banks. The Commissioner sees a path to updating the Commission’s rules and regulations. She tweeted last Thursday, “Protecting financial stability means banks & brokers staying on top of emerging and evolving risks. That is clear in 2023. Whether it’s cyber, conflicts w/ affiliates, new tech, commingled customer $, or climate change [CFTC] needs a framework for evolving & emerging risk.

Earlier last week, Commissioner Kristin Johnson expressed her interest in re-visiting digital asset-related rules for Derivatives Clearing Organization (DCO) registrants and applicants in the wake of a new advisory by the CFTC.

innovation and insurance

The Consumer Financial Protection Bureau (CFPB) reminded consumers last week that, in the CFPB’s opinion, CashApp and Venmo are risky and banks are not. And it all boils down to insurance. “Funds stored in a payment app may be at significantly higher risk of loss for a consumer than if it is deposited in an insured bank or credit union account,” writes the CFPB in an “Issue Spotlight.”

Government continues to struggle with balancing innovation and consumer protection as the agency concludes, “The CFPB, in coordination with other state and federal regulators, will continue to monitor the evolution of this segment of the payments ecosystem and consider whether further steps should be taken to protect consumers.” Read the report.

Japan’s stablecoin law

In Japan, the country’s largest bank MUFG (Mitsubishi UFJ Financial Group, Inc.) says that it will issue a stablecoin called Progmat Coin on multiple public blockchains, including Ethereum. Ledger Insights covers the announcement and reports, “Progmat Coin is designed to support stablecoin issuance from various trust banks, not just MUFG. Yesterday, new enabling legislation came into force, allowing Japanese trust banks to issue stablecoins.” Read more.

for the record

Last Thursday, The Department of Homeland Security announced it is looking for more information about digital asset transactions.  Blockchain analytics firms such as Chainalysis, TRM Labs and Elliptic are likely licking their digital “chops.”

EC1293 — Executive Communication – June 1, 2023

The abstract:

“A communication from the Assistant Secretary for Legislative Affairs, Department of Homeland Security, transmitting a legislative proposal, which would clarify the U.S. Secret Service’s authority to investigate various crimes related to digital asset transactions and would significantly strengthen the ability of the agency to counter transnational cyber criminal activity… Referred to the Committee on the Judiciary.”

still more tips

Elon Musk is accused of insider trading by investors in Dogecoin lawsuit – Reuters

Blockchain Association files amicus brief in Coin Center v. Treasury – Blockchain Association

Hong Kong’s crypto rules offer level playing field, investor protection, says OSL exchange executive – Yahoo Finance

FTX Racks Up $100 Million in Bankruptcy Fees – The Wall Street Journal

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