Congressional bid for new U.S. crypto exchange oversight draws early plaudits

Congress now has a new bill before it that, if approved, would open the door to a new regulatory regime for U.S. exchanges.

And thus far, the proposed measure is drawing plaudits from industry participants and stakeholders.

To be sure, as The Block reported on Thursday, the framework in question is a voluntary one, providing an alternative to the state-by-state approach that exchanges currently navigate in order to provide services in the U.S. The pitch by Congressman Michael Conaway is that exchanges would be better served by applying for a designation as a so-called Digital Commodity Exchange (DCE) under the guidance of the Commodity Futures Trading Commission (CFTC).

At its core, the legislation represents a major sea-change in how exchanges are regulated. And while it may be some time before the legislation moves across the finish line — it would require approval in both chambers of Congress as well as the president’s signature — it’s the kind of proposal that industry businesses seeking clarity have been calling for since the sector’s early days.

Among those sounding supportive notes: CFTC chairman Heath Tarbert, who tweeted out not long after the bill’s formal unveiling.

Thank you @ConawayTX11 and @HouseAgGOP for your outstanding leadership in the digital regulatory space. As we continue moving forward into a digital world, this legislation will help advance opportunities for 21st century commodities. https://t.co/EqiKKFCSBH

— Heath Tarbert (@ChairmanHeath) September 24, 2020

Christopher Robins, chief compliance officer for Binance.US, told The Block that “The challenges associated with the fragmented state-licensing and regulatory regimes that most cryptocurrency exchanges are subject to have been well-documented.”

“The introduction of the Digital Commodity Exchange Act signals the House's recognition of the need for a more streamlined regulatory framework. Opting into a federal alternative to the current state-by-state framework would be a welcome development for many market participants."

Industry trade group the Blockchain Association published a blog post shortly after the bill’s unveiling, during which it lauded the forward-looking nature of the legislation.

“Members of industry can find comfort in the fact that crypto is no longer viewed by Washington as simply ‘a plaything for nerds.’ Instead, politicians, lawmakers, and regulators alike are beginning to see the industry for what it truly is: the future,” the Blockchain Association wrote.

Guy Hirsch, managing director and head of U.S. for eToro, told The Block in an email that his firm would consider registering under such a regime should it come to fruition.

“We have experience in this and already saw success with registration of our crypto exchange, eToroX, in Gibraltar,” he said. “We worked with the regulator to satisfy all the requirements, and we have reasons to believe that if we decide to move forward with a registration in the US that it will have a similar result.”

In particular, Hirsch highlighted the voluntary nature of Conaway’s proposal.

“We do like the voluntary aspect of it, which creates a healthy competition between a state-by-state regime and a federal one,” he wrote. “This gives market participants options, rather than being forced into one framework or the other. We also like the idea of clarity, so that exchanges will face clear guidelines to play by the rules in the US. It would certainly boost growth in the industry and see more retail and institutional investors trust this asset class and allocate to it.”

Coinbase, Kraken and Gemini did not immediately respond to requests for comment.

It is, perhaps, that volunteer aspect of the regime that will make or break its success. Should exchanges opt-in, it would constitute a redrawing of the regulatory lines within the United States — at least, insofar as how they are overseen as marketplaces for commodities.

But Conaway’s proposal nonetheless advances a process that began about five years ago when the CFTC first made clear that it would view cryptocurrencies as commodities. Yet the Internal Revenue Service still views them as forms of property while, in the eyes of agencies like FinCEN, they are virtually akin to money.

Even so, the bill represents an effort — a proposed one all the same — to make the existing regulatory landscape a bit more clear for those building businesses and offering services within it.