Following the announcement DOJ/SEC enforcement actions alleged insider trading against a former Coinbase employee, many cried foul at the perceived "regulation by enforcement." The SEC Complaint, alleged – for the first time – that certain Ethereum-based cryptocurrency tokens were securities. But as anyone familiar with the crypto world knows, things move quickly….
On August 3, 2022, a bi-partisan group of Senators introduced the Digital Commodities Consumer Protection Act of 2022 (“DCCPA”). The DCCPA gives the Commodity Futures Trading Commission (“CFTC”) exclusive jurisdiction to regulate the trading of “digital commodities.” Significantly, Bitcoin and Ether were specifically defined as digital commodities.
One of the DCCPA’s sponsors, Senator John Boozman, aptly described the current regulatory landscape in the crypto world as “a patchwork of regulations at the state level.” The DCCPA aims to resolve that lackluster regulatory environment by, as Senator Debbie Stabenow explained, “closing regulatory gaps and requiring that these markets operate under straightforward rules that protect customers and keep our financial system safe.”
Here are just a few of the highlights from the DCCPA:
- DCCPA Defines Digital Commodity: A “fungible digital form of personal property that can be possessed and transferred person-to-person without necessary reliance on an intermediary.” The DCCPA specifically defines Bitcoin and Ether as digital commodities. Digital Commodities do not include physical commodities, securities, or digital currency backed by the US government. It also appears this definition would not include NFTs. See NFTs: A Flash in the Crypto Pan or Virtual Gold? (Part 1)
CFTC Registration: Requiring all digital commodity platforms to register with the CFTC. This includes trading facilities, brokers, dealers, and custodians. This means exchanges allowing individuals to trade Bitcoin and Ether must register with the CFTC. Mining activity alone does not trigger registration requirements as a digital commodity platform.
Jurisdiction: CFTS has exclusive jurisdiction over digital commodity trades. BUT the DCCPA recognize that other federal regulatory agencies have a role to play in regulating digital assets that are not commodities, but function more like securities or forms of payment.
BSA/AML: Establishes digital commodity platforms as financial institutions for purposes of the Bank Secrecy Act.
Digital Commodity Platform Compliance Measures: Prohibits abusive trading practices, requires cybersecurity programs, mandates reporting of suspicious transactions, and imposes advertising and consumer protection standards
Although the DCCPA is a long way from becoming law, it is an important first step in filling the regulatory void that the crypto world has thrived in, or thrived despite, for years.
It also remains to be seen how the DCCPA’s grant of exclusive authority to the CFTC to regulate digital commodities like Bitcoin and Ether will impact the SEC’s regulatory reach. Are we poised to see a regulatory clash between the CFTC and the SEC over whether a particular token is a commodity or a security?