With the loss in court for the Securities and Exchange Commission’s latest attempt to impose top-down rules to regulate cryptocurrencies, it’s clear that a bipartisan approach is needed in Congress. A team of legislators on the House Agriculture Committee and the House Financial Services Committee released a discussion draft of landmark crypto legislation that would provide much-needed clarity and stability for a market that is currently plagued by uncertainty and confusion. This legislation, while not perfect, represents one of the best efforts put forth by Congress to address the key challenges and opportunities posed by digital assets. This legislation is a game changer for bringing crypto into the mainstream and resolving the uncertainties surrounding its regulatory status. Serious advocates should proceed with this legislation with bipartisan feedback and support.
The draft legislation touches upon many technical aspects to modernize the regulatory regime for crypto, but a few areas stand out as critical advancements to the way Congress approaches this issue. First and foremost is the progress made in defining whether a digital asset is a commodity or a security. This may sound like a trivial distinction, but it has huge implications for how these assets are regulated and taxed.
I proposed a simpler definition earlier this year that appears to have significantly influenced the development of this legislation. What’s important in this definition is language for decentralization to the Digital Commodities Consumer Protection Act’s definition. The language “without direct and immediate managerial control over its operation, immutability, irreversibility, and scarcity exercised or held in reserve by an individual or organization, as indicated within the intrinsic nature of the property and associated distributed ledger technology” created the first comprehensive definition that could properly delineate the difference between digital securities and commodities.
Indeed, the current legislation potentially expands upon this definition and is an unmistakable improvement over previous bills that failed to provide clear guidance. Reflecting the need for a well-defined distinction, there are clear thresholds and deadlines for the ability of a digital asset issuer or related person to beneficially own stakes in, alter, or otherwise change the blockchain protocol. Using decentralization as a key criterion and defining each definitional component clearly is a laudable step in creating a bright-line distinction between a digital security and commodity, and one which reflects past precedent in a modern lens.
The provision of a defined pathway for a security to become a commodity is another good addition to the legislation. This recognizes that some digital assets may evolve over time and change their nature and function in the market. This also brings up another commendable feature of the bill, which is the widespread use of clear-cut definitions and processes. The more that Congress can define terms clearly, the less unilateral authority the Commodities and Futures Trading Commission (CFTC) or the Securities Exchange Commission (SEC) can exercise in pushing their own policy preferences.
Additionally, creating separate and clear regulatory frameworks for both SEC and CFTC-regulated exchanges will promote further growth and stability in these markets and end the current “regulation by enforcement” regime that creates fear and uncertainty among investors and innovators. Allowing trading platforms to respectively register as Alternative Trading Systems and/or Digital Commodity Exchanges will modernize current law and align it with the realities of the digital age. Finally, the mandates within the law for a transitional period and for interagency cooperation will be paramount in facilitating a smooth entry into a new and improved era of crypto regulation — one not as subject to the whims of regulators as the current situation is.
With that being said, it is clear that the path forward must be bipartisan. Lawmakers from both parties need to work together from this excellent foundation to create a more stable and predictable regulatory and enforcement environment for digital assets. This is not only in the best interest of taxpayers and consumers, but also of our national competitiveness and leadership in the global economy. Crypto is here to stay, and Congress must act now to embrace it.
Nicholas Johns is a policy and government affairs manager for the National Taxpayers Union, a nonprofit dedicated to sound fiscal policy for taxpayers everywhere.