US Congress passes crypto regulation bill criticized by SEC, Biden

On May 22, the United States House of Representatives passed a bill titled the ‘Financial Innovation and Technology for the 21st Century Act’, which establishes a regulatory framework for cryptocurrencies and responsibilities between the Commodity Futures Trading Commission (CFTC ) and demarcate the Securities. and Exchange Commission (SEC). The CFTC will have the authority to regulate a digital asset as a commodity if the blockchain, or digital ledger, on which it runs is functional and decentralized, while the SEC will regulate a digital asset as a security if the associated blockchain functional, but not decentralized.

The bill amends both the Securities Exchange Act of 1934 and the Commodity Exchange Act of 1936 to divide responsibilities between the SEC, which regulates the securities market, and the CFTC, which regulates derivatives such as futures and options, based on the nature of the blockchain . . The bill classifies a blockchain as decentralized if “no person has unilateral authority to control the blockchain or its use, and no issuer or affiliated person has control over 20% or more of the digital asset or the voting power of the digital asset not.” The bill also excludes cryptocurrencies from the definition of “investment contracts” in the Securities Act of 1933.

Cryptocurrency developers are also subject to new disclosure rules, including information related to the digital asset project’s operation, ownership and structure. Crypto exchanges, brokers and dealers will be required to provide appropriate disclosures to clients, segregate client funds from their own and minimize conflicts of interest through registration, disclosure and operational requirements.

Why it matters

The core issue here is regulatory oversight. According to a Coindesk explainer, US law defines ‘securities’, i.e. financial instruments such as stocks and bonds, as ‘investment contracts’, meaning that a person who invests money in a security is “led to expect profits solely from the efforts of the promoter or a third party.” If cryptocurrencies are considered securities, they will be subject to the SEC’s strict compliance regime. The SEC argued that the cryptocurrencies should be considered securities, while the CFTC insisted on classifying them as commodities as exchangeable, that is, a bitcoin is exchangeable for another bitcoin.

The bill was criticized by many, including SEC Chairman Gary Gensler, who argued that the bill would “create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk.” ” In a public statement he made the following points:

By excluding investment contracts recorded on a blockchain from the statutory definition of securities, investors would no longer be protected by federal securities laws. The bill allows crypto issuers to self-certify whether their blockchains are decentralized or not and gives the SEC 60 days to challenge their claims. However, Gensler argued that there is not enough time to adequately contest most of the claims. “Given limitations on staff resources, and no new resources provided by the bill, it is unlikely that the SEC will be able to review and challenge more than a fraction of those assets,” he said. The bill determines whether or not securities laws should apply to a cryptocurrency based on the nature of the blockchain, abandoning the Supreme Court’s long-standing ‘Howey test’. “But it’s the economic realities that should determine whether an asset is subject to the federal securities laws, not the type of recordkeeping ledger,” according to Gensler. The bill waters down regulations for the cryptocurrencies that do fall under the SEC’s purview. The legislation excludes crypto-trading platforms from the SEC’s jurisdiction and thus also excludes investors on crypto-asset trading platforms from protections afforded to other investors. The bill creates a broad exclusion for organizations that fall under the category called “Decentralized Finance.” The bill could functionally eliminate existing exemptions by creating a new exempt offering framework. He states: “The self-certification process envisioned by the bill puts investor protections at risk not only in the crypto space; it could undermine the broader $100 trillion capital markets by providing a path for those trying to escape robust disclosures, prohibitions on the loss and theft of client funds, enforcement by the SEC, and private rights of action for investors in federal courts. This could encourage non-compliant entities to try to choose which regulatory regimes they want to be subject to – not based on economic realities, but possibly based on a label.”

Gensler concludes: “The crypto industry’s record of failures, fraud and bankruptcies is not because we don’t have rules or because the rules are unclear. This is because many players in the crypto industry do not play by the rules. We must make the policy choice to protect the investing public over facilitating business models of non-compliant companies.”

The passage of the bill comes in the background of Congress’s rejection of SEC’s Staff Accounting Bulletin-121 (SAB-121), which sees the staff regarding the obligations a company had to sell crypto-assets of users protect. On May 8, the House passed HJ RES. 109, which overturned the bulletin and said that “such rule shall be of no force or effect.”

The White House criticized the resolution, arguing that it “could inappropriately limit the SEC’s ability to ensure appropriate deregulation and address future issues related to crypto-assets, including financial stability.” Furthermore, President Biden threatened to veto the resolution if it was presented to him.

Biden also criticized the recently passed bill, saying, “HR 4763 in its current form lacks adequate protections for consumers and investors involved in certain digital asset transactions.” He did, however, express a willingness to work with Congress on developing legislation for digital assets.

Read also:

STAY UP WITH TECHNOLOGY NEWS: Our daily newsletter with the top story of the day from MediaNama, delivered to your inbox before 09:00. Click here to subscribe today!