House GOP Introduces New Bill to Demystify Crypto Regulation: The Financial Innovation and Technology for the 21st Century Act
In a pivotal move for the digital assets space, Chairmen Glenn "GT" Thompson (PA-15), French Hill (AR-02), and Dusty Johnson (SD-AL) of various House Subcommittees, have introduced H.R. 4763, the Financial Innovation and Technology for the 21st Century Act. The Act, which is a result of months of feedback from stakeholders and market participants, seeks to establish a regulatory framework for digital assets, designed to protect consumers and investors while promoting American leadership in the digital asset sector.
The landmark legislation, which is intended to prevent scenarios like the alleged theft of billions in customer funds by FTX, promises robust consumer protections and clear rules for market participants. The Act is set to be considered by the House Committees on Financial Services and Agriculture next week, marking a significant step towards regulatory clarity and certainty in the rapidly evolving digital asset industry.
Let’s briefly summarize what’s in the 212 page proposed bill.
TITLE I—DEFINITIONS; RULEMAKING; PROVISIONAL REGISTRATION
Sec. 101, 102, 103: These sections lay out definitions to be used under the Securities Act of 1933, the Commodity Exchange Act, and the current Act, respectively.
Section 102 provides important definitions for several terms in the context of digital commodities:
Digital Commodity: This is defined as any unit of a digital asset held by an individual (not a digital asset issuer, a related person, or an affiliated person) before and after the blockchain system related to the digital asset is operational and certified as a decentralized network. The term doesn't include a permitted payment stablecoin.
Digital Commodity Broker: This is defined as any person engaged in soliciting or accepting orders for the purchase or sale of a unit of a digital commodity from a customer that is not an eligible contract participant, or on a registered entity, or registered with the Commission as a digital commodity broker. Exceptions are provided for individuals making payments or participating in facilitating, operating, or securing a blockchain system.
Digital Commodity Custodian: This term refers to a bank or trust company involved in holding, maintaining, or safeguarding digital commodities.
Digital Commodity Dealer: This term applies to any person who behaves as a dealer in a digital commodity, makes a market in a digital commodity, regularly enters into digital commodity transactions as part of their business, or is commonly known as a dealer or market maker in a digital commodity. The term doesn't include a person solely making transactions with an eligible contract participant, making transactions on a registered digital commodity exchange, or making transactions for personal accounts outside of regular business. Again, exceptions are provided for individuals making payments or participating in facilitating, operating, or securing a blockchain system.
One of the most important sections of the bill also provides clarity on exemptions. The section outlines exceptions where a person would NOT be categorized as a "digital commodity dealer" simply because they:
Engage with Eligible Contract Participants: If the person participates in a digital commodity transaction with a participant eligible to engage in contracts on the financial market, they are not automatically considered a digital commodity dealer.
Use Registered Digital Commodity Exchanges: Utilizing a registered digital commodity exchange to conduct a digital commodity transaction does not automatically designate a person as a digital commodity dealer.
Personal Transactions: If a person conducts a digital commodity transaction for their personal account, either on an individual basis or as a fiduciary, and not as a part of a regular business, they aren't automatically classified as a digital commodity dealer.
Facilitate Payments: If a person enters a digital commodity transaction primarily to make, send, receive, or facilitate payments, involving a payment service provider or peer-to-peer, they are not solely considered as a digital commodity dealer.
Blockchain Support: A person who validates a digital commodity transaction, operates a blockchain node, or participates in similar activities that support the operation or security of a blockchain system is not automatically classified as a digital commodity dealer.
Sec. 104: It stipulates joint rulemaking between the SEC and CFTC, notably regarding definitions, oversight of exchanges, and transactions. The CFTC and SEC are also forbidden from creating rules that limit individual self-custody.
Sec. 105: This section allows digital commodity exchanges, brokers, or dealers to file a notice of intent to register with the CFTC, providing them with temporary protection from some SEC enforcement actions, while not restricting anti-fraud or anti-manipulation enforcement actions.
Sec. 106: Similar to section 105, this section allows digital asset brokers, dealers, or trading systems to file a provisional registration statement with the SEC, granting them limited relief from certain SEC enforcements, with exceptions for anti-fraud or anti-manipulation actions.
Sec. 107: Specifies that the Act does not apply to any contract or transaction regulated under the Commodity Exchange Act. It also clarifies that being registered as a digital commodity exchange, broker, or dealer does not authorize a person to engage in certain activities.
Sec. 108: The CFTC and SEC are directed to work with foreign regulators to establish internationally consistent regulations for digital asset markets.
Sec. 109: The CFTC and SEC are required to implement all rules mandated by the Act within 360 days of its enactment.
TITLE II—DIGITAL ASSET EXEMPTIONS
Sec. 201: This section provides a securities law exemption for a digital asset issuer's sale of digital assets if certain conditions are met, including sales limits, ownership limitations, and registration requirements. A unit of a digital asset purchased under this exemption is considered a restricted digital asset.
Sec. 202: It stipulates the conditions under which certain individuals are permitted to engage in restricted digital asset and digital commodity transactions. Restricted digital assets are allowed to be traded on a digital asset trading system overseen by the SEC, while digital commodities can be traded on a Digital Commodity Exchange (DCE) overseen by the CFTC. End-user distributions, which are broad, non-discretionary distributions issued for minimal consideration, are exempted from securities laws under this section.
Sec. 203: It establishes a new disclosure regime for digital assets. Information that needs to be disclosed focuses on risks associated with digital assets, such as source code, project economics, development plan, affiliated persons, and significant risk factors.
Sec. 204: This section sets up a process for a blockchain network related to a digital asset to be certified as decentralized. Anyone can certify to the SEC that the blockchain network fulfills the Act's requirements. The certification is automatically approved after 30 days unless the SEC issues a stay, and a rebuttal by the SEC can be appealed.
Sec. 205: It stipulates that the provisions under this title will take effect one year after the Act's enactment, or in the case of rulemakings under the title, not less than 60 days after the publication of the final rule.
TITLE III—REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE SECURITIES AND EXCHANGE COMMISSION
Sec. 301: This section excludes digital commodities and approved payment stablecoins from the definition of security under securities laws. It also defines certain terms related to digital assets and clarifies that a digital asset trading system isn't considered a "facility" of an exchange.
Sec. 302: Provides the SEC with anti-fraud and anti-manipulation authority over transactions involving permitted payment stablecoins occurring on or with an SEC-registered entity. However, it limits the SEC's authority over the design and operation of a payment stablecoin.
Sec. 303 & 304: These sections set up a registration framework and establish the requirements for Digital Asset Trading Systems, including rules about order display, fair access, system security, examinations, and reporting.
Sec. 305 & 306: These sections create a registration framework for Digital Asset Brokers and Dealers who must register with FINRA and could also register with the CFTC. They also lay out requirements including capital, recordkeeping, and segregation of customer funds.
Sec. 307: Requires each Digital Asset Trading System, Digital Asset Broker, Dealer, and Notice-Registered Digital Asset Clearing Agency to reasonably implement policies mitigating any conflicts of interest.
Sec. 308: Adds digital assets to "covered securities," which are exempt from state blue sky law registration requirements.
Sec. 309: Obligates SEC-registered intermediaries that offer or intend to offer a cash or spot market in at least one digital commodity to register with the CFTC.
Sec. 310: Exempts certain ancillary activities related to the operation and maintenance of blockchain networks from SEC regulation, while still subjecting them to anti-fraud and anti-manipulation enforcement authorities.
Sec. 311: Allows registration for a Notice-Registered Digital Asset Clearing Agency and instructs the SEC to adopt rules concerning the activities of such agencies considering the nature of digital assets.
Sec. 312: Prohibits federal regulators from requiring state and federal financial institutions to record a liability and a corresponding asset at the fair value of the digital assets they are safeguarding on their balance sheets, aiming to reverse the SEC's Staff Accounting Bulletin 121.
TITLE IV—REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE COMMODITY FUTURES TRADING COMMISSION
Sec. 401: Gives the CFTC new exclusive regulatory authority over certain digital asset transactions, particularly cash or spot markets occurring on entities created in this Act. The CFTC won't have authority over the design or operation of permitted payment stablecoins. Mixed digital asset transactions generally fall under SEC jurisdiction, with exceptions for entities registered with both the SEC and CFTC.
Sec. 402: Requires Future Commission Merchants (FCMs) to hold customer's digital commodities in a qualified digital commodity custodian (QDCC), in alignment with section 4d of the Commodity Exchange Act.
Sec. 403: Establishes the process by which a registered entity can determine that digital commodities are eligible to be traded on or through entities registered with the CFTC. A certification that the digital commodity meets the requirements of the Commodity Exchange Act must be submitted and the Commission has up to 80 days to review it.
Sec. 404: Details the registration and regulation of digital commodity exchanges (DCEs), requiring them to comply with core principles, and subjecting them to comprehensive requirements like segregating customer funds and providing risk-appropriate disclosures. Customers must access a DCE through a digital commodity broker (DCB).
Sec. 405: Outlines the requirements for qualified digital commodity custodians (QDCCs), ensuring they are subject to adequate supervision and regulation by recognized authorities.
Sec. 406: Provides for the registration and regulation of digital commodity brokers (DCBs) and digital commodity dealers (DCDs). Registered DCBs and DCDs must comply with requirements including business conduct standards, fair dealing, customer disclosures, and minimum capital requirements.
Sec. 407: Requires associated persons of digital commodity brokers and digital commodity dealers to register with the CFTC.
Sec. 408: Codifies the treatment of certain Commodity Pool Operators (CPO) that are also registered with the SEC as investment advisors.
Sec. 409: Defines certain ancillary activities related to blockchain networks and exempts these from direct CFTC regulation, while maintaining anti-fraud, anti-manipulation, or false reporting enforcement authorities.
Sec. 410: Requires the CFTC to create all rules required by this title within 360 days of enactment or by the date of effectiveness of the CFTC's final rules requiring registration of digital commodity entities.
Title V – Innovation and Technology Improvements
Sec. 501: Codifies the SEC's Strategic Hub for Innovation and Financial Technology (FinHub), which aids the SEC in addressing technological advancements and understanding their impacts on capital markets. It also facilitates the SEC's response to emerging tech in financial, regulatory, and supervisory systems. The section mandates an annual report to Congress on FinHub's activities.
Sec. 502: Establishes LabCFTC within the CFTC as a source of information on financial technology innovation, making the CFTC more accessible to innovators and enhancing its understanding of new technologies. The section requires an annual report to Congress on LabCFTC's activities.
Sec. 503: Creates a Joint CFTC-SEC Advisory Committee on Digital Assets comprising digital asset marketplace stakeholders. The committee will provide rulemaking recommendations to the CFTC and SEC, and both agencies must publicly respond to these recommendations.
Sec. 504: Updates the mission of the Securities and Exchange Commission (SEC) to include "innovation" as a factor that the SEC must consider during rulemaking.
Sec. 505: Mandates the CFTC and the SEC to conduct a study on decentralized finance (DeFi), including an analysis of its size, scope, benefits, risks, and integration into traditional financial markets. The agencies must submit a report to Congress within a year of enactment.
Sec. 506: Requires the Government Accountability Office (GAO) to conduct a study on non-fungible digital assets (NFTs), analyzing their size, scope, benefits, risks, and integration into traditional markets. The GAO must make the report public within one year of enactment.
Sec. 507: Directs the CFTC and SEC to conduct a study on whether additional guidance or rules are necessary to facilitate the development of tokenized securities and derivatives products. The agencies must submit the report to Congress within one year of enactment.