Following the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announcement of enforcement action against a former Coinbase employee, crypto industry leaders and participants criticised regulators' 'regulation by enforcement' approach.
Noting these views in the crypto community, a bipartisan group of Senators introduced the Digital Commodities Consumer Protection Act 2022 (DCCPA) which gives the Commodity Futures Trading Commission (CFTC) the exclusive jurisdiction to regulate 'digital commodity' trading. Importantly, popular cryptocurrencies such as Bitcoin and Ether were expressly defined as digital commodities.
A key DCCPA supporter, Senator John Boozman, described the current crypto regulatory environment as a 'patchwork of regulations at the state level.' The DCCPA clearly intends to resolve that patchwork, with Senator Debbie Stabenow commenting:
closing regulatory gaps and requiring that these markets operate under straightforward rules that protect customers and keep our financial system safe.
The Bill provides a definition of digital commodity that covers fungible digital forms of personal property that can be possessed and transferred from person-to-person without necessary reliance on an intermediary. The Bill also excludes certain financial instruments including securities, as well as amending the definition of a commodity in the Commodity Exchange Act to include a digital commodity.
The Bill also introduces novel categories of registration including through a digital commodity broker or custodian or through a digital commodity trading facility and associated persons of digital commodity dealers. The Bill does clearly state that mining activity alone is insufficient to trigger registration as a digital commodity platform.
Critically, section 3 of the Bill grants the CFTC the exclusive jurisdiction over digital commodity trades, save for transactions in which a merchant or consumer is using a digital commodity solely for the purchase or sale of a good or service. The Bill also purports to prohibit fraud with respect to any digital commodity trade.
Section 4 of the Bill deals with digital commodity platforms. Pursuant to proposed subsection (a), any entity that is acting as a digital commodity platform must register with the CFTC in one or more of the applicable categories: i) digital commodity broker; ii) digital commodity dealer; and iii) digital commodity trading facility.
Proposed subsection (b) of Section 4 also provides core principles for digital commodity platforms. They generally require digital commodity platforms to comply with all applicable core principles, which are designed to protect customers and the integrity of the digital commodity marketplace. There are two primary obligations placed upon digital commodity platforms:
i) Digital commodity trading facilities are only permitted to facilitate transactions that are not readily susceptible to manipulation, and are required to provide a competitive, open and efficient market for executing transactions.
ii) Digital commodity dealers and brokers are required to establish fair and objective prices; and keep records of all digital commodity transactions and provide information to the CFTC upon requisition. Importantly, the dealers and brokers are required to confirm with business conduct standards, and establish risk management systems.
Proposed subsections (c)-(o) of section 4 also explicitly deal with: rules governing margined or leveraged trading, contract listings, rules and rule amendments for trading facilities, product listing for digital commodity brokers and dealers, customer protections, energy consumption publication and examinations, general prohibitions on fraud, deception and manipulation, self-regulation, dual registration, education and outreach, as well as preemption of State Laws.
The Bill also provides additional amendments in proposed Section 5, notably including an anti-money laundering obligation in accordance with the Bank Secrecy Act. The Bill provides that it will apply to registrants until such time as the date of effectiveness of the final rule requiring registration under the Act accrues.
With a range of legislation being introduced to the US Congress, it might be that we see definitions becoming law in the US sooner rather than later.