Bi-Partisan Effort to Regulate Digital Assets Favors CFTC as Primary Regulator

On June 7, 2022, Senators Cynthia M. Lummis (R-WY) and Kristen Gillibrand (D-NY) introduced a bill to regulate digital assets and promote financial innovation. The proposed legislation is the first significant, bipartisan effort to apply comprehensive regulation to digital assets.

The proposed legislation begins with the premise that digital assets are commodities and their regulation appropriately rests with the Commodity Futures Trading Commission (CFTC). Under the regime as contemplated, the Securities and Exchange Commission (SEC) would be relegated to the regulation of securities offerings of digital assets, but the SEC would not have jurisdiction to regulate the products of those offerings, where they meet the criteria set forth in the bill. These assets would be regulated by the CFTC and subject to significant and on-going disclosure requirements. While some effort is made in the bill to harmonize with the current regime – for example, the title “ancillary assets” does harken to derivatives or futures, which may also relate to products of securities offerings and are already regulated by CFTC – there is little question based on the description that these assets are, in fact, the direct result of a securities offering, so it will be interesting to see how the SEC and CFTC will reconcile this obvious conflict.

Further, jurisdiction of transactions in digital assets and of digital assets exchanges is expressly delegated to the CFTC. The proposed legislation provides for registration of exchanges and includes multiple provisions intended to ensure appropriate taxation of profits from digital assets transactions. Like the recent guidance by the New York Department of Financial Services, and in the wake of uncertainty around stablecoins, the bill includes a requirement that such assets be fully secured at 100% of their face amount by deposits in an insured depositary institution.

Finally, given the on-going transitions occurring in the cryptocurrency and digital assets markets, the legislative proposal calls for study, review and/or reporting, regulation or legislation in a variety of different areas including, for example, interstate financial innovation sandbox activities, state money transmission coordination, decentralized finance markets, and electric consumption in digital assets markets.

While this is a significant legislative step toward more coherent regulatory oversight of the digital assets markets, it is not at all clear that the bill—in its current form—will pass and become law. At a minimum, the bill is sure to provoke important discussions on how to best regulate this complex and volatile market.  That discussion already has begun. CFTC Chairman Rostin Behnam, whose agency stands to gain significant new powers under the proposal, has opined that the bill “does a very good job” distinguishing between what are securities and what are not non-securities. Of course, the latter category is much larger and the proposal leaves that to the CFTC for regulation and enforcement. On the other hand, SEC Chair Gary Gensler’s view is that the lighter regulation contemplated by the proposal, as well as the carve-out from the SEC’s jurisdiction of what appear to be securities products, may leave investors with less protection than they have come to expect. We will watch and report on what comes next.