US Congress Passes Cryptocurrency Regulation Bill, Criticized by SEC and Biden

The United States House of Representatives on May 22 passed a bill titled “Financial Innovation and Technology for the 21st Century Act,” which establishes a regulatory framework for cryptocurrencies and outlines responsibilities between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). The CFTC would 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 would regulate a digital asset as a security if its associated blockchain is 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, on the basis of 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 of 20% or more of the digital asset or voting power of the blockchain.” digital resource”. 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 regarding the operation, ownership and structure of the digital asset project. Cryptocurrency exchanges, brokers and retailers will be required to provide adequate information to customers, separate customer funds from their own and reduce conflicts of interest through registration, disclosure and operational requirements.

Because matter

The central issue here is regulatory oversight. According to an explainer of Coindesk, 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 third parties. “ If cryptocurrencies were considered securities, they would be subject to the SEC’s rigorous compliance regime. The SEC has argued that cryptocurrencies should be considered as securities, while the CFTC insists on classifying them as commodities as interchangeable, i.e. a bitcoin is interchangeable with a more bitcoin.

The bill has been criticized by many people, 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 markets in capital at an immeasurable risk.” In a public statementunderlined the following:

• By excluding investment contracts recorded on a blockchain from the legal definition of securities, investors would no longer be protected by federal securities laws.
• The bill allows cryptocurrency issuers to self-certify whether their blockchains are decentralized or not and gives the SEC 60 days to dispute their claims. However, Gensler argued that this is not enough time to adequately dispute most claims. “Given the limitations on staff resources and the absence of new resources under the bill, it is implausible that the SEC could review and challenge more than a fraction of those resources,” 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 is the economic realities that should determine whether an asset is subject to federal securities laws, not the type of accounting records,” according to Gensler.
• The bill relaxes regulations for cryptocurrencies that fall under the mandate of the SEC.
• The legislation excludes cryptocurrency trading platforms from the jurisdiction of the SEC and therefore also excludes investors on cryptocurrency trading platforms from the protection that other investors get.
• The bill creates a broad exclusion for organizations that fall into the category called “Decentralized Finance.”
• The bill could functionally eliminate existing exemptions by creating a new exempt offering framework.
• It states: “The self-certification process contemplated by the bill puts investor protection at risk not only in the cryptocurrency sector; could undermine the broader $100 trillion capital markets by providing a path for those seeking to escape robust disclosures, prohibitions that prevent the loss and theft of client funds, SEC enforcement, and private rights of action ​​for investors in federal courts. It could encourage non-compliant entities to try to choose which regulatory regimes they wish to be subject to, not on the basis of economic realities, but potentially on the basis of a label.”

Gensler concludes: “The cryptocurrency industry’s record of failures, frauds and failures is not due to a lack of rules or the rules being unclear. It’s because many players in the cryptocurrency industry don’t play by the rules. We should make the choice policy of protecting the investing public rather than facilitating the business models of non-compliant companies.”

The bill’s passage comes in the context of Congress’s rejection of the SEC Staff accounting bulletin-121 (SAB-121), which evaluates employees regarding a company’s obligations to safeguard users’ cryptocurrencies. On May 8, the House passed HJRES. 109who overturned the bulletin and stated that “this rule will have no force or effect”.

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

Biden also criticized the recently passed bill, stating that “H.R. 4763 in its current form does not have sufficient protections for consumers and investors who engage in certain digital asset transactions.” However, he has expressed willingness to work with Congress on developing legislation for digital assets.

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