Ranking Member of the House Committee on Agriculture Glenn Thompson (R-PA) released a revised draft of the Digital Commodity Exchange Act ("DCEA"). The DCEA, initially introduced in September 2020, attempts to build on the existing commodity markets' regulatory framework "to bring certainty to developers, intermediaries, and customers in the digital asset marketplace by establishing clearly defined rules."
The revised DCEA would designate regulatory and registration authority to the CFTC for Digital Commodity Exchanges ("DCEs"), a new type of market that would be subject to requirements that paralleled those of existing commodity derivatives markets.
DCEs would be monitored for (i) trade activity, (ii) abusive trading practices, (iii) minimum capital requirements, (iv) public trade reporting, (v) conflicts of interest, (vi) governance, (vii) cybersecurity and (viii) permitted digital commodities trade offerings. In addition, DCEs would be required to separate customer assets and be subject to the existing commodity broker bankruptcy process. The DCEs would also be required to hold customers' digital assets in a Qualified Digital Commodity Custodian, which itself would be subject to a bank regulatory regime.
Registration of a DCE with the CFTC would be voluntary, but would preempt states' current money transmitter licensing framework, incentivizing trading venues to register with the CFTC, as (i) the money transmitter licensing framework is not "fit-for-purpose when applied to a spot trading market" and (ii) DCEs would not be subject to multiple regulatory authorities.
In an effort to establish "clear jurisdictional lines between the CFTC and the SEC," the DCEA clarifies that entities fundraising for a digital commodity project must comply with securities regulations in order to take investor funds. In addition, the DCEA clarifies that transactions involving assets that satisfy the definition of a digital commodity would be required to comply with the regulatory regime under the DCEA.
The DCEA would also impose trading restrictions on participants in digital commodity presales, which are "the delivery or promise of a digital commodity in exchange for participating in a securities offering or investment contract," until the digital asset is listed by a DCE for trading. Trading restrictions on a digital commodity are lifted once it is sold through a registered DCE, upon which sale it can be used "by any market participant for any purpose." DCEs would be required to assess a digital commodity's susceptibility to manipulation prior to listing it for trade and before it could be sold to the public by participants of a presale.
The DCEA would only allow digital commodity sales and transfers if (i) the asset is transferred to an individual who would have been eligible for the offering in question, (ii) the sale or transfer is done on a registered digital asset exchange, (iii) the purpose of the sale or transfer is to use the asset "for its intended purpose" or (iv) the sale or transfer is carried out pursuant to a "limited CFTC-provided public interest exemption."
As to stablecoins, the DCEA would allow their operators to register with the CFTC, subject to certain requirements, including (i) the public dissemination of essential operational information about the stablecoin, (ii) ensuring that the assets backing the stablecoin are protected, (iii) the mitigation and disclosure of conflicts of interest, and (iv) the maintenance of books and records for inspection by the CFTC. The DCEA would also require stablecoin issuers to comply with "a comprehensive reporting and auditing regime."
Commentary
This is a serious attempt at establishing a framework for the trading of digital assets. The fact that it is largely a voluntary regulatory scheme makes it particularly attractive as it affords the government an opportunity to demonstrate that federal regulation can bring benefits to the table in support of a market (one of those benefits is the avoidance of state money service business regulations).
Of course, there are still many points that would need to be fleshed out. It is not clear on a first read how the proposal would distinguish between those digital assets that are securities and those that are not. The CFTC and the SEC should weigh in on the proposal in light of recent assertions that they support finding a framework for the trading of digital assets.
Primary Sources
- Discussion Draft of H.R. ___: The Digital Commodity Exchange Act of 2021
- Rep. Glenn Thompson Letter
- House Agriculture Committee: Summary of the Digital Commodity Exchange Act of 2021
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