If you're a fan of cryptocurrencies, you might want to pay attention to a new bill called the Financial Innovation and Technology for the 21st Century Act, 2023. This piece of legislation was introduced by a few members of the U.S. House of Representatives, Rep. Glenn Thompson, Chairman of the House Committee on Agriculture; Rep. French Hill, Chairman of the Subcommittee on Digital Assets, Financial Technology, and Inclusion; and Rep. Dusty Johnson, Chairman of the Subcommittee on Commodity Markets, Digital Assets, and Rural Development
The new law has a significant impact on how digital assets like cryptocurrencies are regulated in the U.S. Here's a simplified explanation and how it might affect you and the crypto market as a whole.
The law would consider digital assets as "digital commodities" if they are functional and decentralized, unless they're classified as "restricted digital assets."
Functional means that the digital asset can be used to store or transfer value on a secure platform, used in a blockchain service or app, or used in the governance of the blockchain system. Decentralized means that there's no central authority controlling the asset.
The CFTC (Commodity Futures Trading Commission) would oversee these digital commodities. They'd also look after digital assets that are issued through "end user distribution," which means they are released in a fair manner to users who interact with a blockchain system or to users of a digital asset on its native blockchain network.
2. Restricted Digital Assets and the SEC
The SEC (Securities and Exchange Commission) would regulate "restricted digital assets." These are digital assets that are obtained from the issuer before the networks related to the assets are functional and certified as decentralized. These assets must either be distributed through "end user distribution" or purchased on a CFTC-regulated exchange.
3. Payment Stablecoins
These are a special kind of digital asset used for payments or settlements. The new law doesn't consider these as digital commodities or restricted digital assets. Instead, these are regulated by either federal or state authorities.
Exemptions
The digital assets offered by the issuer and purchaser / investor are exempted in specific situations from registration requirement. These are described below:
The issuer sold a total of no more than $75,000,000 worth of digital assets during the preceding 12 months to be eligible for the exemption.
Purchases by non-accredited (often known as "retail") investors cannot exceed the larger of (i) 10% of the investor's yearly income or (ii) 10% of the investor's net worth within a 12-month period.
In no transaction shall the buyer acquire more than 10% of the total value of digital assets sold under the exemption,
No digital asset supplied outside of an investment contract is offered or sold in this transaction, and
The issuer complies with other standards, such as being a U.S. business and not an investment company as defined by the Investment Company Act.
Federal and state governments in the US have shown significant interest in cryptocurrencies and blockchain technology, though little law making has taken place. Agencies such as the SEC, CFTC, FTC, IRS, OCC, and FinCEN have engaged with the topic, endorsing the technology's potential for future infrastructure.
State-level approaches vary, with some states like Wyoming introducing favorable regulations to stimulate their economies and others issuing cautionary advisories. Wyoming, for instance, has legislated for crypto-focused banks and the formation of DAOs. Other states like Nebraska, Virginia, and Utah have passed laws enabling digital asset banking and allowing crypto transactions. However, states like Iowa have prohibited crypto payments to state agencies.
The term "cryptocurrency" lacks a uniform definition. However, a recent amendment to the Uniform Commercial Code, adopted by several states, includes digital assets.
The Biden Administration has also released an executive order outlining key priorities for addressing the risks and benefits of digital assets, focusing on areas such as consumer protection, financial stability, illicit finance, and U.S. leadership in the global financial system.
A final piece of legislation has a good effect on the economy. The government identifies crypto assets as it as a digital commodity, digital asset, and payment stablecoin thereby opening opportunities for investors and the market.
The bill provides for the establishment and regulation of intermediaries that are “Digital Commodity Exchanges”,“Digital Commodity Brokers,” and “Digital Commodity Dealers” which requires such entities to register with the CFTC.
The bill has the potential to reduce the role of the SEC in the digital asset market, which could lead to more opportunities for the growth of digital assets.However, because there are still uncertainties in cryptocurrency laws, the SEC will still investigate and potentially take action against crypto companies. This means companies must be careful when issuing their digital currencies, to avoid any legal trouble.
For everyday users, this law could make it clearer which agencies are in charge of regulating different types of digital assets. It could also give more protection to investors, by ensuring that companies meet certain requirements before they can offer their digital assets for sale.
In testimony before the House Agriculture Committee, CFTC Chairman Rostin Benham stated that he "generally supports" legislation providing the CFTC more control over the regulation of digital asset exchanges. On the other hand, SEC Chair Gary Gensler has asserted that the SEC is the proper regulator for the market for digital assets and that it had all the necessary statutory authorities. Numerous Democrats have so far listened to Chair Gensler's opinions.
The recent case between SEC and Ripple Labs in Federal District Court where decision was partially in the favor of Ripple Labs indicates the enactment of law to resolve legal ambiguities. With the partial favor in its judgment to Ripple Labs the members of Republican and Democrats have sent letters to SEC urging to revise its regulatory approach. The introduction of bill at times like these predict the reduced role of SEC in the digital asset market.
The assertion by both the chairman of SEC and Commodity makes it apparent that regulation for digital assets must be divided. The landmark bill introduced has passed without changes which states that If the issuer invests in its coin, offers it to the customer directly, and promotes it as an investment opportunity, the coin will be regarded as a security. When Digital Asset is registered with CFTC then it is classified as a digital commodity.
In the end, because of the ambiguity surrounding current cryptocurrency legislation, the SEC will continue to look into and punish cryptocurrency firms. Each firm must carefully consider the issuing of its coins, assess the possibility of Securities Act breaches, and, if necessary, fiercely defend itself and its reputation in the event that the SEC opens an investigation or files charges.
