A New Bill Proposes to Put US Crypto Exchanges Under a National Framework

Coindesk | Nikhilesh De | Sep 24, 2020

DCEA digital commodities exchange act - A New Bill Proposes to Put US Crypto Exchanges Under a National FrameworkA new bill could bring cryptocurrency exchanges under a single federal framework.

The Digital Commodity Exchange Act of 2020, introduced Thursday by Rep. Michael Conaway (R-Texas), seeks to create a federal definition of “digital commodity exchanges,” putting them in their own legal category and charging the Commodity Futures Trading Commission (CFTC) with oversight.

The bill outlines a new framework for digital currencies, treating them similarly to commodities under the Commodities Exchange Act, which governs that asset class. Under the framework, crypto exchanges would enjoy a federal jurisdiction, allowing them to operate in the entire U.S. rather than applying for 49 different state money transmission licenses. The DCEA also allows for certain types of initial coin offerings.

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If passed, the act would streamline a number of disparate cryptocurrency regulations in the U.S., creating legal clarity for token issuers and lowering the barrier to entry for exchanges hoping to operate in a compliant manner.

“The proposed legislation builds on the existing commodity market practices required of Futures Commission Merchants (FCMs) to protect customer assets. DCEs would be required to segregate customer assets and hold them in separately regulated entities which are licensed to custody digital assets,” a summary of the bill said.

The DCEA wouldn’t create prescriptive rules on how exchanges can comply with the new law. Rather, it would describe the requirements and let the exchanges themselves figure out the best way to meet those requirements.

“The CEA works through principles-based regulation, laying out high-level principles – ‘core principles’ – that a regulated entity has to meet,” a committee aide told CoinDesk. “The regulated entity is given flexibility on how to meet those principles, but the CFTC has oversight and can decide if it has met those principles or not. The regulatory regime under the CEA works in large part because it creates a more flexible framework and lets regulated entities be more innovative.”

Federal jurisdiction

The idea of regulating cryptocurrencies under a single, nationwide regime has attracted renewed interest this summer. The Conference of State Bank Supervisors announced earlier this month that it was consolidating its supervision exams for certain crypto exchanges, and there may be plans in the works to streamline the application process for startups to avoid needing more than 50 state and territory licenses in order to operate nationally.

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The Office of the Comptroller of the Currency, a federal banking regulator, wants to bypass the state-by-state regime entirely, instead creating a national payment charter that would let exchanges operate across state lines.

The DCEA follows the latter path, but shifts crypto assets into a familiar framework and grants the CFTC primary supervisory authority over the space.

Token offerings

Perhaps the more daring aspect of the DCEA is a carve-out for token creation and sales. At present, initial coin offerings fall under the Securities and Exchange Commission’s (SEC) remit. The federal securities regulator has treated almost all such token sales as securities sales, either bringing enforcement actions against unregistered offerings or allowing registered sales.

Under the DCEA, companies would be able to raise funds by selling tokens to investors, and remain subject to the SEC during this period. However, if the companies then deliver a token which meets the definition of a digital commodity under the new bill, “transactions involving that asset would be subject to the regulatory regime provided in the DCEA,” the document said.

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