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On this episode of Crypto Bits, Anne Termine and Sam Folb discuss two different pieces of legislation recently proposed that are intended to provide a regulatory framework for digital assets. The first bill is the Responsible Financial Innovation Act, proposed by Senators Lummis and Gillibrand. Senator Lummis is on the Senate Banking Committee and Senator Gillibrand is on the Senate Agricultural Committee. The second bill is the Digital Commodity Exchange Act, primarily introduced by Representative GT Thompson, who is on the House Agricultural Committee.
Can you give me a sense of what the bills are supposed to do and what they cover?
The goal of both these bills is the same. Both are trying to provide regulatory guidance to market participants who are looking to innovate and innovate responsibly. The bills want to protect the consumers who are interacting with these different platforms.
How do the two bills address digital asset?
Starting with the Lummis Gillibrand bill, they go about it as defining these things as digital assets, and a digital asset is already defined as a commodity in the Commodity Exchange Act. The definition that they provide is a natively electronic asset that confers economic proprietary or access rights and is recorded using cryptographically secured, distributed ledger technology.
Going down to the Digital Commodity Exchange Act (DCEA), they go about it from a digital commodity standpoint, and they define digital commodity as any form of fungible and tangible, personal property that can be exclusively possessed and transferred person to person without necessary reliance on a centralized intermediary.
They did provide a little bit further definition of something you have already mentioned they're calling an ancillary commodity Can you give me a little bit further information about what that definition is?
They specifically define an ancillary commodity as “an intangible fungible asset that is offered, sold or otherwise provided to a person in connection with the purchase and sale of a security through an arrangement or scheme that constitutes an investment contract.” It looks like they were looking at Howey as the definition for an investment contract. They're understanding that a lot of these products that are being taken public, and maybe don't necessarily have a use case at that point. Many of these things are ideas that are presented to the public, and people get excited and invest in them. So they're breaking down an ancillary asset and the investment contract to try to make sense of Commodity Futures Trading Commission (CFTC), SEC jurisdiction and the ancillary asset would be assigned to the CFTC and the investment contract would still be under SEC jurisdiction.
Does the difference come down between an ancillary asset and an investment contract about the rights afforded to someone who has that asset?
It seems more of a use case type of problem, because a lot of these cryptocurrencies are being issued by these developers with the promise that the token will go up. A lot of people are speculating on the price of the token. That's not to say that there's some people who actually are buying the token to have access to the underlying software and utilize that software. They're viewing it as a utility token, but I think they want to cover the investors who are going in there purely for speculative reasons. They want to make sure if a company is promising to offer this piece of software, this piece of tech that can be worked into a tech stack, that they don't just rug pull the investors and say like, "Hey, here it is. We'll take all your money and then never deliver anything to you."
In terms of jurisdiction, did both bills fall on the CFTC as having primary jurisdiction?
Both bills give the CFTC primary jurisdiction over fungible, digital asset market or digital commodity market, as long as they don't fall under the definition of Howey and our investment contracts. So, it's still a guessing game where they give it to them but they say, "If this falls under the SEC's jurisdiction, this is still subject to the SEC."
What else did you take away from both of these bills and where do you think we are headed in terms of legislation?
I think we're going to get there. The world is moving in that direction where everybody understands that there needs to be some sort of guidelines, some legislation that is in place to regulate these actors. I think it's going to start with stablecoins. I think we were talking about that on the last podcast where that is the low hanging fruit right now. There are so many new pieces of technology and innovation that are coming out where there needs to be guidance. So I think it's going to be stablecoins, taxation guidance and then the DCEA. I think that was a really good start for these exchanges. So, I think those will be the three big portions of legislation that will probably first come to fruition.
Have questions about digital assets, cryptocurrency or crypto regulations? Email Anne Termine.
The opinions expressed in this podcast are those of the speakers and do not necessarily reflect the viewpoint of their institutions or clients.