On July 12, 2023, US Senators Cynthia Loomis (R-WY) and Kirsten Gillibrand (DN.Y.) proposed a revised version of the previously introduced cryptocurrency regulatory bill to create better protections for the cryptocurrency industry. . , stricter consumer protection regulations and anti-money laundering regulations. The Loomis-Gillibrand bill, also known as the Responsible Financial Innovation Act ("RFIA"), addresses the need for increased regulation of digital assets. The proposal partially addresses this need by creating well-defined regulatory roles for the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC"), the two primary regulators that regulate the cryptocurrency market in the United States. the states and creating a new self-regulatory agency, the Office of Consumer Protection and Market Integrity. Recent actions by the CFTC against Blockratize, bZeroX (and its successor Ooki DAO), and others, as well as recent actions by the SEC, certainly call for more clarity on the role and regulation of the CFTC and the SEC. cryptocurrency in general. Action taken against major cryptocurrency exchanges.
The revised RFIA makes a clear distinction between digital assets, which are classified as "securities" and are regulated by the SEC, and "commodities," which are regulated by the CFTC. The proposal states that assets that do not give the investor a financial interest in the company, debt, equity or otherwise, are not considered securities, even if they "arise from operational and management efforts that determine the value of the asset." Since most digital assets, including bitcoin and ethereum, which account for more than half of the digital asset market capitalization, would be considered commodities under this distinction (according to the bill's supporters), the proposal instead gives them digital regulatory power. CFTC based assets. According to the RFIA, the CFTC "shall have jurisdiction only over a contract, arrangement or transaction involving an agreement to sell a commercially fungible crypto-asset that does not include digital receivables and other unique crypto-assets." Definition of transaction exclusion. . Non-Fungible Tokens (or "NFTs").
The proposal makes the CFTC the primary regulator of digital assets in several ways. For example, the RFIA requires the CFTC to oversee cryptocurrency exchanges and requires US “crypto exchanges” to register with the CTFC (although registration was only optional in previous versions of the bill); "Decentralized cryptocurrency exchanges" or DeFi services are regulated separately in the bill. The SEC is not entirely clear, however, as the RFIA consistently requires cryptocurrency issuers to disclose information to the SEC twice a year. However, while the tokens of these issuers continue to qualify as "commodities" under the above criteria, cryptocurrency issuers: will fall outside the scope of SEC regulation. Additionally, according to the bill, a CFTC-regulated “crypto-asset” would not include “an asset that gives the owner of the asset any of the following rights in an entity: (i) debt or equity in that entity; (ii) in connection with that entity; the right to liquidate; (iii) the right to receive interest or dividends from such entity; (iv) any other financial interest in such entity.These types of digital assets are subject to SEC jurisdiction.
In terms of consumer protection, the RFIA has several important provisions:
The CFTC, SEC, banking authorities and a new self-regulatory agency, the Office of Consumer Protection and Market Integrity, have been given enforcement powers over new consumer protection requirements for cryptocurrencies.
All cryptocurrency brokers must review their reserves and conduct annual reviews mandated by the Public Company Accounting Oversight Board.
Customer agreements must be written in plain language and such agreements and subsequent amendments must be stored in a public database.
Establishing mandatory conditions for notifying customers.
Include core reporting, risk management and segregation and third-party custody requirements, as well as restrictions on cryptocurrency lending and debt restructuring standards.
The obligation to specify the final settlement period of transactions between the intermediary and the client in the contracts with the clients, as required by law.
Establish advertising standards for the marketing of cryptoassets, including obligations to be fair, balanced and not misleading, and disclosure requirements, including compensation.
Require cryptocurrency brokerages to promptly report cybersecurity breaches and direct the CFTC and SEC to develop cybersecurity standards for brokerages and other brokerages in consultation with other agencies.
The full list of consumer protections outlined in the RFIA is a direct response to fraud and unscrupulous players in the digital asset market (which was a motivating factor behind the initial launch of the RFIA in 2022). In addition, these measures are consistent with the RFIA regulations to prevent the use of digital assets in illicit financial transactions, including stronger criminal penalties for willful violations of the Digital Assets Bank Secrecy Act, stronger anti-money laundering measures, and the avoidance of penalties. and increased Financial Crimes Enforcement Network ("FinCEN") reporting, similar to legislation introduced by US Senator Elizabeth Warren (D-MA) in December 2022 (Digital Assets Money Laundering Enforcement Act (S.5267)).
After the RFIA revision was introduced in the Senate on July 26, 2023, a similar bipartisan initiative was introduced in the House of Representatives. The House Financial Services Committee approved a plan to implement the 21st Century Financial Innovation and Technology Act. , a bill that defines when a digital asset is a security or commodity and also clarifies the CFTC and SEC's regulatory jurisdiction over the US cryptocurrency market. The House bill would give the CFTC jurisdiction over digital assets issued through "hard" and "decentralized" or "end-user distribution" exchanges. The SEC will have jurisdiction over digital assets by ensuring that the networks that hold these assets are "operational" and "decentralized." The House bill also states that neither the CFTC nor the SEC will have the authority to regulate stablecoins. Depending on the characteristics of a stablecoin, it is regulated by the Federal Reserve Board, the Office of the Comptroller of the Currency, or state regulators. While the House bill drew opposition as it passed committee, these recent legislative changes signal that regulatory transparency is an important issue.
It remains to be seen whether the Loomis-Gillibrand bill, the House bill, or a third proposal to regulate digital assets will pass, but the proposals underscore an important bipartisan effort to address the underlying issues affecting the current asset landscape.
© 2023 Proskauer Rose LLP. Review of the National Law, XIII, no. 220