The United States House of Representatives has introduced the Digital Commodity Exchange Act of 2020 (DCEA), intended to fill in the regulatory gaps that exist between the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) in digital asset markets.
DCEA creates a framework to regulate trading venues that list emerging digital commodities, such as Bitcoin, Ether, their forks and other similar digital assets, for public trading. Additionally, it provides a regulated process for presold digital commodities to become publicly available for trading without sacrificing protections for retail consumers. According to an announcement by Rep. Mike Conaway, who introduced the bill, it provides authority for the CFTC to register and regulate Digital Commodity Exchanges as a new type of registered entity with requirements that closely parallel the requirements for existing intermediaries in commodity derivatives markets. The law attempts to simplify the spot market for digital assets by providing trading venues an alternative to state-by-state money transmitter regulations. It also relies on state and federal banking regulators to license and supervise custodians.
A registered Digital Commodity Exchange (DCE) would be subject to comprehensive CFTC oversight and regulations. Similar to how trading facilities, such as Designated Contract Markets (DCMs) and Swap Execution Facilities (SEFs), are regulated by the CFTC, a registered DCE would be required to comply with regulations regarding monitoring of trading activity, prohibition of abusive trading practices, minimum capital requirements, public reporting of trading information, conflicts of interest, governance standards, cybersecurity and more.
Additionally, the proposed legislation builds on the existing commodity market practices
required of Futures Commission Merchants (FCMs) to protect customer assets. A registered Digital Commodity Exchange would be required to hold customer digital commodity assets in a Qualified Digital Commodity Custodian, which would be an entity regulated by a state, federal or international banking regulator. The CFTC would set minimum standards for supervision and regulation a regulator would have to impose in order for an entity regulated under the regime to be deemed “qualified.”
Registration with the CFTC would preempt the existing state-based money transmitter licensing regime trading venues are currently subjected to, which are not fit-for-purpose when applied to a spot trading market. Registration would be voluntary but would have “strong incentives” for properly placed trading venues: Such venues would be able to opt into the CFTC Digital Commodity Exchange regime or remain regulated under individual state money transmitter licenses; however, they will be incentivized to choose CFTC regulation in order to reduce their regulatory burdens by facing only one regulator, be eligible to offer leveraged trading and be the point of entry for new digital commodities to the retail public.
In addition, the DCEA also simplifies the process of bringing new digital commodities to market by creating clear jurisdictional lines between the CFTC and the SEC, and establishing a more collaborative, flexible process to evaluate the appropriateness of making digital commodities available for public trading.
The DCEA would continue to require entities raising money to fund a digital commodity project to follow securities laws to accept funds from investors. This activity would be subject to the jurisdiction of the SEC; however, if participation in a securities offering results in the promise or delivery of an asset that meets the definition of a digital commodity, transactions involving that asset would be subject to the regulatory regime provided in the DCEA.
Note: The DCEA defines the delivery or promise of a digital commodity in exchange for participating in a securities offering or investment contract as a “digital commodity presale.” Participants in digital commodity presales would be subject to the new trading restrictions on the assets received through the presale until a registered digital commodity exchange listed the asset for trading and the asset is sold through a registered digital commodity exchange.