On June 1, House Financial Services Committee Chair Patrick McHenry (R-NC) and

House Committee on Agriculture Chair Glenn “GT” Thompson (R-PA) released a discussion draft of legislation intended to fill gaps in digital asset regulation and provide a framework that will provide the crypto industry and consumers with some much-needed certainty. The proposal includes a definition as to when a project is sufficiently decentralized to no longer have its tokens qualify as investment contracts, provides for the Commodity Futures Trading Commission (CFTC) to have jurisdiction over digital commodities and the U.S. Securities and Exchange Commission (SEC) to have authority over digital assets offered as part of an investment contract, and contemplates joint rulemakings between the SEC and the CFTC related to defining key terms and the oversight of dually registered exchanges.

In the press release accompanying the proposed legislation, Chairman McHenry stated: “This discussion draft is the first step toward delivering on Republicans’ commitment to develop clear rules of the road for the digital asset ecosystem. Our goal is to strike the appropriate balance between consumer protection and encouraging responsible innovation.” Chairman McHenry further encouraged market participants to provide constructive feedback on the proposal. This draft comes on the heels of other countries’ recent development of comprehensive digital asset regulatory regimes to provide clear rules and attract investment in this fast-growing industry.

Highlights from the 162-page Digital Asset Market Structure Discussion Draft include:

  • A process for converting a crypto security to a crypto commodity depending on its features.
  • A process for a blockchain relating to a digital asset to be certified as decentralized. The process would permit any person to certify to the SEC that the network meets the decentralization test. The SEC would then be provided an opportunity to rebut that assertion.
  • A provision that the SEC “may not exclude a trading platform from operating pursuant to an exemption as an [alternative trading system (ATS)] solely on the basis that the assets traded are digital assets. It also requires the SEC to revise regulations to exempt ATSs that offer digital assets, digital commodities, and payment stablecoins from registration as a national securities exchange and revise the ATS framework to permit disintermediated trading and real-time settlement consistent with what is necessary or appropriate in the public interest or for the protection of investors.”
  • Providing the CFTC with jurisdiction over the new category of digital commodity exchanges (DCE) where certified crypto commodities could be traded. DCEs would only be allowed to list digital commodities not susceptible to manipulation and for which public disclosures have been made regarding source code, transaction history, and digital asset economics. DCEs would also be subject to requirements to segregate customer funds, provide risk-appropriate disclosures, and be members of a registered futures association.
  • A requirement that the two agencies conduct a study on decentralized finance (DeFi), including “an analysis of the size, scope, role, nature, and use of DeFi protocols, the benefits and risks of DeFi, how DeFi has integrated into the traditional financial markets, including the risks of DeFi integration, and the levels and types of illicit activities in DeFi compared to traditional financial markets.”

The House Agriculture Committee will conduct a hearing on the proposed legislation today. This draft legislation is an important initial move towards regulatory clarity for digital assets in the United States.