The White House recently released its first-ever framework for the responsible development and oversight of digital assets, stemming from an executive order President Biden enacted in March. This follows on the heels of over 50 bills on digital assets that have been introduced by the 118th Congress to date. Among these proposed bills, the Digital Commodities Consumer Protection Act (DCCPA) takes the most practical approach to digital asset oversight and should be encouraged by industry players who are looking for concrete guidance on how to operate their business in accordance with the law.
Introduced in August, the DCCPA aims to settle the ongoing dispute between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over which entity should serve as the primary regulatory body overseeing U.S. cryptocurrency industry. The bill puts the CFTC in the driver’s seat and empowers it to regulate spot markets for a newly established digital commodity asset class, excluding securities.
Congress held its latest hearing on the DCCPA on September 15, and the law is not expected to pass during this congressional term - a fate it shares with all recently proposed crypto bills. Yet, the reinvigorated focus on crypto legislation in recent months means a vote on crypto legislation of some sort is more of a matter of when, not if. Serious players within the space have long advocated for better crypto regulations. If the CFTC ultimately plays a more prominent role in crypto regulations than the SEC in the form outlined in the DCCPA, it will be a promising sign for sustained crypto innovation in the U.S.
Why? Because the hard-working regulators at the SEC and CFTC are charged with an important responsibility: keeping retail investors safe and ensuring the safety of the system. That is good for innovation. But regulators also risk creating red tape and deterring innovation. It’s been four years since the ICO peak, and the crypto community is still left wondering how to effectively determine whether certain tokens are securities or not at the margin. Instead of providing clear guidance on this important issue, the SEC has been taking an approach of strategic ambiguity and selective enforcement to deter bad behavior, which is akin to hanging a Sword of Damocles above the heads of every well-intentioned crypto project and founder.
To be fair, it’s not really the SEC’s fault. SEC Chair Gensler is charged with regulating securities, and some crypto tokens share similarities to securities. The SEC is using the tools it’s been given to pursue the mandate that outdated laws have prescribed, and existing legislation does not give them better tools or rationalize their mandate. But for every crypto token that resembles a traditional security, there’s another that is something else entirely. For instance, most tokens don’t have a direct claim on an issuer or explicit return built into them, unlike stocks and bonds. And all traditional securities are issued by a centralized entity, whereas many tokens are issued in a decentralized manner or become more decentralized over time.
As a result, the SEC’s current approach is problematic and several members of Congress have started pushing back on the SEC. For example, Senator Toomey recently pointed out that the focus for regulators and legislators should be on the important structural differences between crypto tokens and traditional securities, not the semantics over whether to call crypto tokens “securities” or not. Even if the SEC believes that crypto tokens are sufficiently similar to traditional securities, it’s impossible to deny that much of existing securities law and regulation can’t possibly apply to them.
The DCCP therefore provides welcome relief by allowing exchanges to self-certify that a listing is a commodity and giving the CFTC the right, but not the obligation, to reject their labeling. This is a far less restrictive approach than the one the SEC has applied and could deter bad actors while allowing well-meaning crypto projects to move forward with their plans without having to constantly second-guess their legal status.
The crypto community should welcome this “default to yes” approach across the web3 space as an effective approach to regulation that recognizes the reality of crypto’s Cambrian explosion in product innovation. In crypto, there will always be more new products than the CFTC or any government agency could possibly have the resources to proactively approve, and the approach outlined in the DCCPA would help crypto projects avoid long wait times for regulatory approval and resulting bottlenecks to innovation.
This isn’t to say that the CFTC can or should unilaterally oversee the U.S. crypto industry. In her opening statement at last week’s DCCPA hearing, Chairwoman Stabenow expressed her support of SEC Chair Gensler’s recent comments about how the CFTC and SEC can work together to make crypto markets safer, and there is still a long way to go before Congress passes a full-fledged crypto regulation framework. So while we encourage the passage of the DCCPA, this is just a start. The crypto industry needs comprehensive, tailor-made legislation to provide the clarity it needs so that responsible builders and users can move forward confidently within the bounds of the law.