Update 636 — The Crypto Commodities:
How and When to Regulate a New Market?
The Fed just this afternoon voted to raise interest rates by another 75 basis points as expected (full coverage on Friday), with immediate impact on the regulated capital markets as well as the unregulated ones. In the last year, the unregulated crypto markets have seen turbulence — booms, busts, bankruptcies — growing while market participants have suffered massive financial loss.
With crypto getting Hill attention, industry and policy experts are calling for an explicit regulatory framework. A key Senate Agriculture Committee hearing last week addressed a bill co-sponsored by Sens. Stabenow, Boozman, Booker and Thune: the Digital Commodities Consumer Protection Act (DCCPA), which could be the starting point for crypto commodity regulation… in the next Congress.
Today, we cover the Senate Agriculture hearing on DCCPA, regulation jurisdiction, timing, and political choices ahead, and survey other crypto legislative and regulatory developments.
By way of relevant background, here are some key asset definitions and respective jurisdictions:
- Commodity: a fungible asset that may characterize a commodity, utility, or a contract. This can occur in the real world or in the virtual world through the use of various tokens; however, some scholars contend digital assets do not fit this definition as their value is not based on some underlying tangible asset, and whose business model can transform overnight. Traditional commodities are overseen by the Commodities Futures Trading Commission (CFTC).
- Security: an asset that represents ownership and holds monetary value. The Howey Test is a tool often used to determine when assets are deemed securities. Securities can exist either in the real world or in the virtual world and are overseen by the Securities and Exchange Commission (SEC).
- Financial Market Utilities: a multilateral system that works to aid in clearing, transferring, or settling payments/securities within or among various financial institutions. Supervision over financial market utilities is conducted by the Federal Reserve.
Hospitable Hearing Suggests Consensus
The Digital Commodities Consumer Protection Act, introduced in early August by Senators Debbie Stabenow and John Boozman, aims to explicitly define the regulatory landscape for digital assets by designating the Commodity Futures Trading Commission as the primary regulator over cryptocurrency commodities. The goal is to bring further regulatory certainty to the growing digital commodity ecosystem in efforts to protect investors while still promoting innovation and growth.
The bipartisan legislation grants the CFTC exclusive jurisdiction of digital commodity trading, including Bitcoin and Ether. The bill, which effectively designates the CFTC as the main regulatory authority for digital commodities, also mandates registration by a broader range of digital markets participants, similar to that of existing commodity businesses. Under DCCPA’s new Commodity Exchange Act registration categories, businesses could have several different registrations in multiple platform categories, all of which would need to fully comply with the agency’s core principles.
Last week’s Senate Agriculture hearing was less of a debate about DCCPA and more of a committee-based rally in support. All six witnesses provided support with little to no criticism.
The first panel gave CFTC Chairman Rostin Benham the chance to plead his case and explain why his agency was the best fit. Benham emphasized the need for market integrity and consumer protection, a combination he believes could be satisfied under DCCPA. Citing the agency’s nearly 60 enforcement cases in just under eight years, Benham claimed the agency stands ready to tackle new risks and was adamant the CFTC could swiftly effectuate regulation. Chair Benham offered up a convincing argument but failed to effectively lay out how exactly the new regime would protect investors and provide market integrity.
The next panel’s witnesses expressed uniform support for the bill, describing it as satisfying the need for regulatory oversight and argued in favor of its potential to help spur economic growth and promote U.S. leadership. The panel concluded that DCCPA was designed to stand the test of time, saying its bipartisan roots would likely weather any political change. Like Benham, the second panel’s words of encouragement were shadowed by an inability to define ways in which investors would be considered.
Members of the Senate Agriculture Committee were generally receptive to the bill, with the exception of Senator Durbin who questioned its ability to adequately protect participants. There was some hesitation when Benham revealed his agency estimated the need for about $112 billion in funding, a number that lawmakers believe the agency could be lowballing. The consensus among the committee and witnesses was that something needs to be passed soon, or the U.S. will continue to fall behind and companies will take their work elsewhere.
SEC v. CFTC
At the crux of DCCPA is the new and expanded jurisdiction it gives the CFTC – a conversation debated over the last several years. The bill attempts to carve out territories for agency oversight, leaving many to wonder just how involved the SEC would be under this specific framework. With the CFTC granted exclusive regulatory responsibility over Bitcoin and Ether – roughly 60 to 67 percent of the market – the SEC will have to fight for influence in the remaining portion.
Chairman Benham quickly explained that the two agencies talk at the highest level and have frequent intersections within their markets. He cited the urge to work together to make this framework collaborative, emphasizing the importance of communication and transparency rather than agency roles. While the CFTC and SEC have a number of formal MOUs in place, it seems coordination between the two agencies has been spotty when it comes to digital assets.
The passage of this bill would ultimately do little to end jurisdictional turf wars. Witnesses pointed out the bill’s failure to provide a definition for a digital asset security versus commodity and others cited the need for stronger consumer protections. The CFTC’s limited history and legal precedent needed to draft investor protection rules could result in a safe harbor for digital assets, not a robust regulatory regime. Even with additional funding, the CFTC may struggle to adequately review and legitimize a whole slew of digital assets that will suddenly call themselves commodities, opening the door to more bad actors in the marketplace.
The SEC is arguably the more equipped agency to oversee crypto. It is better funded and has already taken significant action in terms of enforcement and registration requirements. Not only has the SEC attempted to lay out a preliminary framework, but it has added over 20 positions to their Crypto Assets and Cyber Unit and brought forward more than 80 enforcement actions in the last five years alone.
The political calculus for this bill is complicated. If Republicans gain control of either chamber of Congress, they could force further concessions that favor industry and put off accountability. However, with the increasing probability of Democrats returning to power, a 52-seat Democratic majority in the Senate could abolish the filibuster and remove the need for any Republican input on this legislation, allowing a new draft that better protects consumers, investors, and financial stability.
Elsewhere in the Digital Asset Space…
While the Digital Commodities Consumer Protection Act wades into the debate on agency jurisdiction, other parts of the digital asset conversation have changed through other venues and mediums. Below are brief updates on other digital asset topics that are moving in both the short and long term.
- After months of anticipation over a stablecoin bill from Waters and McHenry, there is still no draft for public review. There is rumored text circulating with a full public announcement as early as next week. Financial stability and consumer protection advocates will be on guard as previous iterations of the bill, specifically areas regarding non-bank issuers, were deemed particularly problematic.
- Over the last several months, the Federal Reserve has been researching the potential for a U.S.-issued central bank digital currency. With many other countries rolling out their own pilot programs, lawmakers have expressed concern over falling behind in terms of global competitiveness. But not all policymakers and advocates are as concerned about getting it done fast as opposed to implementing a CBDC correctly and deliberately.
- Fed Vice Chair for Supervision Michael Barr revealed the Fed is looking at what steps would be needed to implement a digital dollar and determining the cost-benefit to market participants. While exploration and thorough research are necessary, Barr said he did not believe a CBDC was an urgent need from the Fed and is not in crisis mode about the need to issue one.
- For the past six months, government agencies have been working on reports to articulate a clear framework for responsible digital asset development as required by the President’s digital assets executive order. According to a White House Fact Sheet, the nine reports submitted reflect the input and expertise of diverse stakeholders and articulate a clear framework for responsible digital asset development. Specifically, the reports call on agencies to promote innovation and increase efforts to mitigate any downside risks. Additionally, the reports encouraged the Fed to continue its exploration into a CBDC by calling for the creation of a Treasury-led interagency working group to support the agency’s efforts.
The Road Ahead
Congress may not have the bandwidth to pass crypto legislation this term, but the bills brought forward will likely serve as the starting point for debate next year. A split Congress would be worrisome for financial stability and consumer protection advocates hoping to at least quell the worst portions of these bills, but an empowered Democratic Congress could ensure consumer and investor protection are at top of mind.
With the recent treasury reports addressing a number of crypto-related concerns and lawmakers actively taking up legislation, Congress is likely to pass some digital asset framework within the next few years, so it is up to advocates to make these bills as safe as possible and prevent the metastasization of crypto’s woes into the rest of the economy.