While most of the world’s central banks are pondering the creation of new digital currencies, the rise and horizontal spread of cryptocurrency continues unabated. In a seemingly anarchical ecosystem, there are few forms of obvious or state control and intervention, and fewer legislative interventions. But this may soon change. An ambitious bill has been submitted to Congress by US Representative Don Beyer to enact new rules aiming to bring clarity to the categorization and oversight of cryptoassets. To discuss the bill, the latest episode of the Fintech Beat Podcast brings together former Commodity Futures Trading Commission (‘CFTC’) General Counsel, Patrick McCarty, with the fintech expert and law professor, Dr. Chris Brummer. Both experts look to provide listeners with an insight on what this proposal will look like and the challenges embedded within.
This fascinating episode begins with an overview of the proposed Bill submitted by Don Beyer. The Bill aims to address the plethora of legal ambiguities facing the digital assets sector. It also paves the way to create a regulatory framework in which these assets can be categorized. Regulatory clarity, a longstanding aim of cryptocurrency industry and market participators, as well as policymakers, remains elusive. With enforcement actions on the rise and regulatory institutions perplexed over where their jurisdictions lie, the Digital Asset Market Structure and Investor Protection Act (the Bill), looks to provide the answers.
With Don Beyer’s description of the legal landscape for digital asset’s as “ambiguous and dangerous for investors and consumers”, many issues have been addressed in this Bill. The Bill consists of five different titles and seeks largely to manage ambiguities concerning consumer protection, trade reporting and transparency, and anti-money laundering / know your client (AML/KYC) procedures for digital assets. The Bill also sets out a reporting requirement for the chapter of decentralized finance. The most promising part is where it also looks to address many practical issues such as the categorization of assets and the establishment of standards for consumer protection, and the bill tasks regulators to focus on clarifying the legal status of some of the cryptocurrencies with the largest market capitalizaiton. Specifically, the Bill looks to introduce new terms to the regulatory lexicon, and requires the categorisation of digital assets as either digital assets or digital asset securities.
Dr. Brummer is no stranger to existing financial regulatory structures, and the professor lives in the heart of the nation’s regulatory capital, Washington D.C., with his wife Rachel Loko, who is herself a securities law expert. However, perhaps Chris Brummer’s best talent lies in imagining the financial world of tomorrow, and the coming together of technology, finance and regulation. As the faculty director of Georgetown’s Institute of International Economic Law, Dr. Brummer has not only taught at several leading universities but also completed a term as a member of the National Adjudicatory Council of FINRA, an organization with powers invested by Congress, tasked to regulate the securities industry, and his work praised in helping ensure investor protection. When he’s not busy honing the brightest young minds of tomorrow, he is regularly involved in organizing the DC Fintech Week Conference, of which he is the founder and host. DC Fintech Week Conference, which was recently held October 18-21, 2021, brings together the who’s who of the finance world in fruitful discussions on the fintech ecosystem. DC Fintech Week falls true to its objective every year; which is to democratize information and provide participants from all sectors of the industry an opportunity to engage in discussions about fintech and the future of finance.
During the conference, numerous technologists expressed concern about a world in which citizens are left rudderless in assessing and mitigating the risks that are inherent within cryptocurrency. In principle, the Beyer Bill would address the concern. The Bill currently sets out a proposal where the top 25 major digital assets sorted by highest market capitalization and high daily average trading volume shall be classified as a digital asset or digital asset security. But as Chris Brummer notes, the categorization is only the beginning of the exercise. If found to be a security, an issuer would have to register the securities with the SEC and it would have to make continuous disclosures subject to the SEC’s oversight. And even as a commodity, a digital asset would be subject to the CFTC’s antifraud authority. This work is presumably vital for regulators and market participants alike in order to avoid market chaos as the sector grows. According to Patrick McCarty, 46 million Americans own digital assets today and the market cap is increasing rapidly. Where the SEC has been unable to categorize those digital assets that they find to be securities, Congress now has to step in and provide clarity.
Dr. Brummer poses a very thoughtful question where he asks Patrick McCarty whether categorization would solve the issue of litigation? With the amount of litigation seen in this area, wouldn’t issuers of a security challenge the rule taking undertaken by the SEC and the CFTC—or challenge their categorization as securities? Patrick replies by suggesting that litigation is an unavoidable an inherent to the regulatory process. The biggest advantage of this proposal, however, is that it provides a better process than the system in which both market participants and regualtors are currently operating. Tens of companies had filed no action reliefs with the SEC for years to once and for all define what a digital asset is and it is those companies that will be sighing in relief at this Bill.
The Bill will also set a registration requirement for ‘virtual asset service providers’ (VASPs) that provide services in the US or to US persons. Such VASPs would be required to register with the SEC or the CFTC. This would be mandatory even if the VASP were to be located outside of the US. The targets of this provision are such entities that are trying to circumvent the jurisdiction of US regulatory authorities. Another interesting provision of the Beyer Bill is how it would also allow for the “desecuritization” of a Digital Asset Security at any point after it is registered as a security with the SEC. This would inevitably allow for digital securities to carry out an ICO to obtain funding and then create a product service or platform. Once that is done they could choose to desecuritize in a way similar to the method today to deregister a security, under section 12 (g) of the 1934 Securities Exchange Act.
In a conclusion to the brilliant episode, Dr. Brummer and Patrick talk about how Don Beyer’s brainchild also looks to prohibit the use of any fiat-based stablecoin that is not approved by the Secretary of the Treasury; and also authorises the Federal Reserve to issue “Digital Federal Reserve Notes” with legal tender status. Let’s keep our fingers crossed to see how the rest of the market responds to this Bill. Till the next episode!