This morning, senators Debbie Stabenow (D-MI.) and John Boozman (R-AR.) introduced a new crypto regulatory bill called the Digital Commodities Consumer Protection Act. The bill was co-sponsored by Cory Booker (D-NJ), and John Thune (R-SD).
Here’s the bill’s 1-pager to a broad summary of the provisions:
Expanding CFTC Oversight
The most prominent piece of the Digital Commodities Consumer Protection Act, as you may have guessed from the title, is the designation of Bitcoin and Ethereum as commodities, thus placing them in the jurisdiction of the CFTC. This is the right move as the CFTC has proven to be more balanced in its regulation of digital assets thus far, whereas the SEC has taken a fairly aggressive stance on most cryptocurrencies.
The bill would grant the CFTC the same authority over digital commodities that they currently have over physical commodities. This includes rigorous licensing, fees, and compliance requirements for exchanges and service providers (more on this later).
Commodity vs Security?
This echoes the “commodity unless proven otherwise” section we saw in the Responsible Financial Innovation Act, although this bill is less explicit on what “unless proven otherwise” means. The RFIA had the following provisions to determine if a digital asset is a security or not:
- Voting rights with respect to that entity.
- Rights to interest, dividend payments, or profits with respect to that entity.
- A debt or equity interest in that entity.
- Liquidation rights with respect to that entity.
It’s difficult to tell exactly where the line will be drawn, but it seems likely that many DeFi tokens and interesting use-cases will eventually be classified as securities. Still, it’s positive to see so much consensus from legislators that BTC and ETH are both commodities.
Standards for Listing Commodities
While the bill is vague about what other digital assets might be commodities, there is this interesting provision for which digital commodities exchanges are allowed to list:
Digital commodity dealers… may not trade, or arrange a trade, in a contract for a digital commodity that is readily susceptible to manipulation or that is determined to be inconsistent with the Act.
It’s admirable that this bill is trying to address market manipulation since it is a real problem, but that’s as specific as the language gets. No mention of liquidity or trade volume or how decentralized the holders of the asset are.
Consumer Protections & Education
Another positive section of the Digital Commodities Consumer Protection Act is the emphasis on consumer protection and education.
All digital commodity platforms must, among other things, implement conflict of interest procedures; maintain adequate financial resources; establish system safeguards to minimize cybersecurity and other operational risks; and comply with Commission requirements for the treatment of customer assets.
If the above regulations were in place, it’s less likely that the meltdown at Celsius would have reached critical mass. The RFIA also had provisions for use of customer funds and required disclosures, so it’s good to see both bills in alignment on this issue as well.
There’s also a clause mandating better disclosures to users:
Requires the Commission to adopt customer protection rules, including requiring a digital commodity platform to disclose to customers material conflicts of interest and material risks of trading digital commodities; communicate in a fair and balanced manner; and establish standards for the platform’s marketing and advertising.
This is the sort of common-sense consumer protection that needs to be evenly enforced across all centralized service providers. As it stands we are relying on exchanges to voluntarily do these things. Some good exchanges do; many don’t. And as we’ve seen over the past month, real users are getting hurt because of the lack of risk disclosure and transparency from big service providers.
The more challenging parts of this bill are those dealing with the red tape of regulation. Specifically, the bill requires service providers to register with the CFTC:
Mandates that any entity acting as a digital commodity platform must register with the Commission in one or more of the applicable categories (i.e., digital commodity broker, digital commodity custodian, digital commodity dealer, and digital commodity trading facility).
This is in contrast to the Responsible Financial Innovation Act which allowed for optional registration. Service providers would also have to register if they served digital assets deemed securities, as well as be members of a registered futures association.
All of the above points combined, while generally good for end-users, place a large burden on anyone who wants to provide services using crypto and digital assets. This is definitely a positive with respect to large exchanges like Coinbase, FTX, or Kraken (or Celsius before they imploded). These big players can afford the costs of compliance and users will benefit from their being held accountable. However, the added costs will likely be passed on to customers in the form of higher fees.
There is also the problem that these added layers of bureaucracy make it difficult (or simply too expensive) for newer players to compete.
Like the RFIA, the Digital Commodities Consumer Protection Act is another piece of crypto legislation that is generally positive. The two bills share a lot in common, and it’s great to see multiple legislators from both sides of the aisle come to the same conclusions.
To sum up:
- BTC & ETH classified as commodities is the right move
- Need more clarity on everything else – what is a security and what isn’t?
- Positive consumer protections and risk disclosures that could prevent the next Celsius situation
- With all this comes more red tape for service providers, which means more fees for users
If you like anything in this bill – or even if you don’t and have strong opinions – the most important thing you can do is to contact your senators and let them know what you think.
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