Blueprint for CFTC regime over crypto exchanges enters Congress

Quick Take

  • The Digital Commodities Exchange Act has returned to Congress as a draft, with the member of Congress behind it hoping to solicit comment from industry stakeholders. 
  • Broadly, the DCEA would establish a voluntary regulatory regime for crypto exchanges under the auspices of the CFTC.
  • A federal regulatory regime for crypto has become a subject of great interest in Congress, but lawmakers across the aisle seem to want something with more teeth. 

Congressman Glenn Thompson has released the Digital Commodities Exchange Act to the public.

Rather than introducing his bill on the floor, Thompson preferred to open a draft up to public comment, he told The Block in an interview. 

“If I'd operated in a typical Congressional way, we would have dropped it and done a press release. But I want to make sure we get what's best,” said Thompson, the leading Republican on the House Agriculture Committee.

The draft bill would establish a new regulatory regime for cryptocurrency exchanges at the Commodity Futures Trading Commission. Currently, spot markets have no federal regulator in the U.S., though that is a contentious subject. 

Gary Gensler, chairman of the Securities and Exchange Commission, has argued that custodial crypto exchanges already fall under existing securities laws, making them subject to securities exchange regulation — which features more stringent rules than CFTC oversight. Rostin Behnam, President Biden’s pick to lead the CFTC, has publicly indicated the desire for the CFTC to keep and even expand those authorities. 

However, the CFTC does not generally have a regulatory regime — with expectations for executions and reporting — for spot commodities markets. In spot markets, it is typically limited to enforcement against fraud and manipulation.

Central to the current version of the Digital Commodities Exchange Act is both its creation of a spot regime for crypto spot markets and its delegation of the lion’s share of those authorities to the CFTC: 

“Notwithstanding any other provision of law, the Commission shall have exclusive jurisdiction over any agreement, contract, or transaction involving a contract of sale of any digital commodity in interstate commerce which is offered, solicited, traded, executed, or otherwise dealt in on or subject to the rules of a registered entity, including the conduct of any such office or business.”

Per the bill, such a regime would be voluntary, but it would supersede state-by-state licensing. However, it does not expand the CFTC’s existing powers to pursue exchanges that serve U.S. customers.

“There are some initial offerings that certainly would be considered securities, and those are those are best left with the SEC,” Thompson told The Block. “But once those cryptocurrency are issued, the way they function, they are commodities and commodities are regulated in a very principle-based, effective way with the CFTC.”

However, the CFTC has not changed the types of services under its regulatory purview since the 2010 Dodd-Frank Act added Swap Execution Facilities

Thompson inherited a fair bit of the bill from his predecessor on the House Agriculture Committee, Mike Conaway, who introduced similar legislation at the end of 2020 — shortly before his own retirement from Congress to open a lobbying firm.

The new version does away with some of the ways with which the original looked to provide more financing for the CFTC’s regime. But the biggest change is the addition of an extensive section relating to stablecoin operators, which it refers to as “fixed-value digital commodity operators.”

A new report from the President’s Working Group, led by the Treasury, called for quick congressional action to regulate stablecoins. 

The regime for “fixed-value digital commodity operators” in the draft legislation seems to address a number of the common concerns for stablecoin issuers, especially the redemption of backing assets and information disclosures.

But, like the regime for exchanges, the regime for stablecoin operators would remain voluntary, with no punishment for failure to register.

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