The US Congress passed a bill regulating cryptocurrencies, criticized by the SEC and Biden

On May 22, the United States House of Representatives passed legislation titled the “Financial Innovation and Technology for the 21st Century Act,” which establishes a regulatory framework for cryptocurrencies and establishes responsibilities between the Commodity Futures Trading Commission (CFTC) and the Stock Exchange and Exchange Commission (SEC). ). The CFTC would have the authority to regulate digital assets as a commodity if the blockchain, or the digital ledger on which it operates, is functional and decentralized, while the SEC would regulate digital assets as a security if the blockchain associated with them is functional but not decentralized.

The bill amends both the Securities Exchange Act of 1934 and the Commodity Exchange Act of 1936 by dividing responsibilities between the SEC, which regulates the securities market, and the CFTC, which regulates derivatives such as futures contracts and options, depending 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 related person has control over 20% or more of the digital asset or voting rights in the digital asset.” The bill also excludes cryptocurrencies from the definition of “investment contracts” in the Securities Act of 1933.

Cryptocurrency creators are also subject to new disclosure rules, including information related to the operation, ownership and structure of the digital asset project. Cryptocurrency exchanges, brokers and dealers will be required to provide appropriate disclosures to customers, segregate customer funds from their own and limit conflicts of interest through registration, disclosure and operational requirements.

Why is it important?

The fundamental issue here is regulatory supervision. According to an explainer from Coindesk, US law defines “securities”, i.e. financial instruments such as stocks and bonds, as “investment contracts”, which means that a person investing money in a security “is willing to expect profits solely from the efforts of the promoter or third party.” If cryptocurrencies are deemed securities, they will be subject to the SEC’s rigorous compliance regime. The SEC argued that cryptocurrencies should be considered securities, while the CFTC insists that they be classified as interchangeable goods, i.e., bitcoin is interchangeable with other bitcoin.

The bill was criticized by many people, including SEC Chairman Gary Gensler, who argued that the bill “would create new regulatory loopholes and undermine decades-old precedents for the supervision of investment contracts, exposing investors and capital markets to immeasurable risk.” In a public statement, he addressed the following issues:

• By excluding blockchain investment contracts from the statutory definition of securities, investors would no longer be protected by federal securities laws.
• The bill allows cryptocurrency issuers to self-assess whether their blockchains are decentralized or not and gives the SEC 60 days to challenge their claims. However, Gensler argued that this was not enough time to properly dispute most of the claims. “Given staff resource constraints and the lack of new resources provided under the Act, it is unlikely that the SEC would be able to review and challenge more than a fraction of these assets,” he said.
• The bill determines whether securities laws should apply to cryptocurrency or not based on the nature of blockchain, abandoning the Supreme Court’s long-standing “Howey test.” “But economic realities should determine whether an asset is subject to federal securities laws, not the type of accounting it maintains,” Gensler says.
• The bill relaxes regulations on cryptocurrencies, which fall under the SEC’s jurisdiction.
• The legislation excludes cryptocurrency trading platforms from the SEC’s jurisdiction and therefore also excludes investors on crypto asset trading platforms from the protections that other investors receive.
• The bill provides for a broad exclusion of organizations falling under the “Decentralized Finance” category.
• The bill could functionally eliminate existing exemptions by creating a new framework for exempt offers.
• It states: “The bill’s self-certification process threatens investor protection not only in the crypto space; it could weaken the broader $100 trillion capital markets by providing a path for those trying to avoid robust disclosures, prohibitions to prevent the loss and theft of customer funds, SEC enforcement, 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 potentially based on labeling.

Gensler concludes: “The crypto industry’s history of failure, fraud, and bankruptcy is not due to a lack of rules or because the rules are unclear. This is because many players in the cryptocurrency industry do not follow the rules. We should choose policies to protect investors rather than facilitate the business models of non-compliant companies.”

The bill’s passage comes against the backdrop of Congress’ rejection of Employee Accounting Bulletin SEC-121 (SAB-121), which outlined employees in relation to the company’s obligations to protect users’ cryptoassets. On May 8, the House adopted the resolution of HJ RES. 109, which repealed the bulletin and stated that “such provision shall have no force or effect.”

The White House criticized the resolution, arguing that it could “inappropriately limit the SEC’s ability to provide appropriate safeguards and address future issues related to cryptocurrencies, including financial stability.” Additionally, President Biden threatened to veto the resolution if it was presented to him.

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

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