The introduction of the “Digital Asset Market Structure Discussion Draft” by House Republicans on May 5 marks a significant step towards reshaping the regulatory environment for cryptocurrencies. According to Justin Slaughter, vice president of regulatory affairs at Paradigm, this draft could potentially diminish the influence of large crypto firms while fostering broader market participation.
The discussion draft is described as an “incremental, albeit meaningful, rewrite” of the Financial Innovation and Technology for the 21st Century Act (FIT21). Led by House Agriculture and Financial Services Committee Chairs Glenn Thompson and French Hill, this bill seeks to create a more equitable playing field for all participants in the digital asset market.
One of the notable changes in this draft is the adjustment of the definition of an affiliated person. The threshold has been lowered from owning more than 5% to more than 1% of a digital commodity, a move interpreted by Slaughter as a mechanism to limit the power of large players in the market. He argues that this change signals the bill’s intention to promote a “democratization” of the cryptocurrency sector.
“This is a portent of the entire bill. There are often criticisms of crypto being too dominated by a few large firms. This bill makes clear the regulatory regime proposed is going to push against that fact and strongly encourage more small ‘democratization’ of the space.”
The draft also introduces the definition of a “mature blockchain system,” identifying it as one that does not fall under the “common control” of any singular individual or group. Additionally, the Securities and Exchange Commission (SEC) is designated as the primary regulator of crypto network activities until such networks become sufficiently decentralized.
The bill outlines that decentralized finance trading protocols, which allow users to conduct financial transactions “in a self-directed manner,” will be exempt from registering as digital commodity brokers or dealers. This clarity aims to facilitate innovation while maintaining necessary regulatory oversight.
By labeling digital commodities as “investment contract assets,” the draft seeks to distinguish their treatment from that of stocks and other traditional assets in accordance with the Howey test. Under this framework, securities laws would only be activated in cases where the secondary sale of tokens also entails a transfer of ownership or profit in the underlying business.
The potential for crypto firms to raise funds while operating under the SEC’s regulation and establishing a clear registration process with the Commodity Futures Trading Commission is promising. Furthermore, the proposal includes establishing joint rulemaking and procedures between the CFTC and SEC regarding the delisting of non-compliant assets.
A ‘Clear Opportunity’ for Innovation
House committee members have emphasized the need for a comprehensive regulatory framework for crypto, seeing it as a “clear opportunity” to promote innovation in the U.S. financial landscape and reinforce the dominance of the U.S. dollar. Criticism has surfaced regarding the Biden administration’s regulation-by-enforcement approach, which has often left industry players in a state of uncertainty.
Dusty Johnson, Chairman of the Subcommittee on Commodity Markets, Digital Assets, and Rural Development, stated, “America needs to be the powerhouse for digital asset investment and innovation. For that to happen, we need a commonsense regulatory regime.” Slaughter echoes this sentiment, noting that this draft could provide the clear regulatory framework long awaited by stakeholders in the crypto industry.
Challenges Ahead
Despite the bill’s potential, it faces immediate roadblocks. House Financial Services Committee Ranking Member Maxine Waters has indicated plans to block a Republican-led hearing discussing digital assets, pointing to challenges in gaining consensus within the committee.
The upcoming hearing, titled “American Innovation and the Future of Digital Assets,” aims to address the newly pitched discussion paper. Nonetheless, current rules necessitate agreement from all committee members for such events, highlighting the political complexities surrounding cryptocurrency legislation.
As the digital asset landscape continues to evolve, the implications of this draft will be closely monitored by industry experts, regulators, and participants alike. Stakeholders are hopeful that a balanced and clear regulatory structure will pave the way for future growth and innovation in the crypto sector.
