New Senate Crypto Bill Would Limit SEC’s Regulatory Role in Favor of CFTC | Skadden, Arps, Slate, Meagher & Flom LLP

[ad_1]

A bipartisan bill introduced in the US Senate last week aims to “bring crypto assets into the regulatory perimeter” by giving the Commodity Futures Trading Commission (CFTC) oversight responsibility for most forms of cryptocurrency.

The new bill, sponsored by the senses. Cynthia Lummis and Kirsten Gillibrand, builds on a bill the pair introduced during the last session of Congress, but now comes in the wake of the collapse of cryptocurrency exchange FTX and amid a major enforcement push by the Securities and Exchange Commission (SEC), which, in the absence of clear direction from Congress, has taken the position that nearly all digital assets are securities and therefore fall within its jurisdiction. The Lummis-Gillibrand proposal envisions a much reduced role for the SEC in regulating this asset class.

At the heart of the bill is granting exclusive jurisdiction to the CFTC to regulate transactions involving “cryptographic assets,” which are defined as electronic assets that confer economic rights or access rights that are recorded on distributed ledger technology or a similar analogue. “Crypto assets” also include “ancillary assets,” which are assets such as crypto tokens that are sold as part of investment contracts and often used to fund crypto projects in their early stages. Under the bill, even where the issuer of an ancillary asset “has engaged in corporate or managerial endeavors that have primarily determined the value” of the token — which, according to the test established by the Supreme Court in SEC v. SEC Disclosure Requirements.

However, the SEC would still retain some jurisdiction over digital assets under the bill. To the extent that a digital asset confers “all [] financial interest” in a “business entity,” including “debt or equity,” “liquidation rights,” or “right to payment of interest or dividends,” the asset would not be treated as a “crypto asset” or “ancillary asset” and would instead be subject to SEC jurisdiction, as traditional securities are.

The bill also contemplates the formation of a self-regulatory body (SRO) – a “customer protection and market integrity authority” – for the digital asset space. The SRO’s responsibilities would extend to fraud prevention and discipline, consumer protection, promoting free trade and facilitating cooperation among regulators. The bill further details the contours of joint SEC and CFTC oversight authority over the SRO.

Other notable aspects of the bill include:

CFTC registration requirements for “crypto asset exchanges,” i.e. trading facilities that list one or more “crypto assets” (but not for “decentralized crypto asset exchanges,” acknowledging the role of decentralized finance (DeFi) in the digital asset space). Segregation requirements for client assets and restrictions on lending, including a ban on rehypothecation of “cryptoassets” by intermediaries. Separate treatment of “payment stablecoins” (digital assets pegged one-to-one to the value of the US dollar), which could only be issued by depository institutions regulated by federal and state banking authorities – but with exclusive CFTC jurisdiction over any activity conducted by a CFTC registrant in connection with a payment stablecoin. A registration pathway for prospective depository institutions that would be solely engaged in the issuance of payment stablecoins and related services. Extension of the fictitious sales tax rule to purchases and sales of digital assets.

It remains to be seen whether the relevant Senate committees will take up the bill and whether there will be political appetite for a bipartisan regulatory overhaul in the run-up to the 2024 election. If the bill progresses in the Senate, the text will undergo potentially significant changes in the committee process before facing further uncertainties in the House of Representatives, where Republican Representatives introduced a competing bill last month. In any case, the Lummis-Gillibrand bill represents an ambitious proposal to bring the emerging digital asset industry into the existing regulatory framework, although it is not the framework that the SEC insists on in its enforcement actions.

Download PDF

[ad_2]