Establishing a regulatory framework
Five Republicans in the U.S. House of Representatives formally submitted a bill to Congress on the 20th, aiming to clarify regulations in the field of crypto assets (virtual currencies). Entitled The Financial Innovation and Technology Act for the 21st Century, the bill is over 200 pages long and aims to establish a “necessary regulatory framework” for consumer and investor protection, fostering innovation, and U.S. leadership in financial technology.
🚨Introducing the Financial Innovation and Technology for the 21st Century Act.This bill establishes a regulatory framework for digital assets, protects consumers, fosters innovation, and positions America as a leader in finance and technology. #crypto https://t.co/0ihzY3MP0k
—House Committee on Agriculture (@HouseAgGOP) July 20, 2023
The co-sponsors of this bill are:
- Glenn Thompson, Chairman of the House Agriculture Committee
- French Hill Digital Assets, Financial Technology and Inclusion Subcommittee Chair
- Dusty Johnson, Chair, Commodity Markets, Digital Assets, and Rural Development Subcommittee
- Congressman Tom Emmer
- Congressman Warren Davidson
A discussion draft of the bill was introduced in early June by Chairman Thompson and House Financial Services Committee Chairman Patrick McHenry, and has been debated by House committees, with extensive input from stakeholders and market participants.
connection:21 Interest Groups Oppose US Republican Crypto Bill “Aiming for Regulatory Clarification”
In a statement, McHenry criticized the current U.S. situation surrounding cryptocurrency regulation, saying, “As other countries move forward with their digital asset regulatory frameworks, and SEC Chairman Gensler continues to enforce regulation, the U.S. lags behind.” “The digital asset space is plagued by regulatory uncertainty, lack of authority and lack of a framework of core operating principles,” Johnson said.
The bill aims to “give seats to both the Commodity Futures Trading Commission (CFTC) and the SEC (Securities and Exchange Commission),” establishing clear principles that the crypto industry is looking for. In addition, we aim to provide clear rules that allow innovators to unlock the full potential of the technology and allow the cryptocurrency ecosystem to thrive in the United States.
Summary excerpt of the bill
The bill calls on the SEC and CFTC to jointly develop crypto-specific rules for trading platforms and exchanges, including definitions of terms used in the bill. On the other hand, both agencies are prohibited from making rules on how individuals store their virtual currency.
The bill grants digital asset issuers who meet certain conditions exemptions from securities laws for token sales. For example, if the total token sales in a 12-month period is less than $75 million. On the other hand, for sales to non-qualified investors (general investors), the total purchase amount in one year is less than 10% of their annual income or 10% of their net assets (the larger amount is the standard). Also, the issuer cannot sell more than 10% of the issued tokens to a single purchaser.
In addition, issuers will be required to file annual and semi-annual reports on their projects with the SEC until their tokens are recognized by regulators as a sufficiently decentralized product. Tokens acquired from digital asset issuers that meet this exemption requirement are considered “restricted digital assets”.
One of the notable points in this bill is that it showed the path of approval for “token decentralization”. Anyone can apply to the SEC for decentralization certification by submitting general information about the blockchain network and an analysis of the four factors that underlie decentralization. If the SEC does not issue a deferment decision within 30 days, it will be automatically considered approved.
There are separate requirements for the SEC and the CFTC for registering digital asset intermediaries.
The bill also amends the Securities Act of 1933, the Securities Act of 1934, and the Investment Advisers Act of 1940, adding “innovativeness” to the factors the SEC must consider when making rulemaking.
Criticism of the bill
The cryptocurrency industry does not appear to be welcoming the bill with open arms.
Delphi Labs general counsel Gabriel Shapiro said the changes from the June discussion draft “completely change the bill’s value proposition.” Instead of bringing clarity, he argued, it would lead to more ambiguity.
Was a huge fan of this bill and they took a lot of feedback but unfortunately they made one change that completely alters the value prop of the bill, reintros massive ambiguity, re-empowers SEC enforcement and would wreak havoc on DeFi…. https://t.co/anYMXpAIoN pic.twitter.com/QXeAXd2Rz9
— _gabriel Shapir0 (@lex_node) July 20, 2023
We were big fans of the bill, and[the lawmakers]took a lot of input. Unfortunately, they made changes that completely changed the value of the bill, increased ambiguity again, re-strengthened the SEC’s enforcement powers, and wreaked havoc on DeFi.
The proposed bill excludes from the definition of “digital assets” traditional securities such as stocks, bonds, “transferable shares” and “equity or participation certificates in profit-sharing agreements.” This is where Shapiro sees the problem.
He noted that the SEC could continue its “fighting stance” on decentralized finance (DeFi) market tokens by claiming they are “transferable stocks” or “profit-sharing agreements.”