This month, the European Union (EU) agreed on the text of a unified licensing regime for cryptocurrency exchanges to operate across the EU bloc as part of its Regulation on Crypto Asset Markets (MiCA). The United States – despite being a traditional world leader in legal frameworks for technological innovation – has not provided the same regulatory clarity.
Domestic cryptocurrency exchanges in the United States are regulated at the state level by a patchwork of money transmission laws that overburden businesses while under-protecting consumers. In our view, many digital tokens are properly characterized as digital commodities rather than securities. Yet, there is no unified federal regime for cryptocurrency exchanges listing digital products.
To create one, Congress must pass legislation that clearly defines “digital commodity” and gives jurisdiction to the Commodities Futures Trading Commission (CFTC) to oversee national digital commodity exchanges. Recent bipartisan bills dealing with the subject suggest that achievement may be within reach.
Don’t let a thousand flowers bloom at the state level
Individual states, rather than the federal government, are the primary regulators of cryptocurrency exchanges and other online payment providers under the heading of money transmitters. – a category of businesses that traditionally consider money transfer providers with physical locations in the state.
These laws are intended to ensure that money transmitters do not lose, steal or misappropriate a customer’s money and impose penalties on those who do.
Related: Biden’s anemic crypto framework offered nothing new
Since cryptocurrency exchanges have customers across the country, they must understand and respect each state’s unique money transmission status.
Letting a thousand flowers bloom in “state experimental labs” can spur legal innovation in some contexts, but it is not suitable for networked cross-border goods like money transmission. As a result, state-by-state licensing of modern money transmitters is inefficient, cumbersome, and lacking in protection.
More importantly, money transmission laws are not designed to protect consumers from market manipulation in spot trading of speculative digital assets between millions of people, as occurs on crypto exchanges. -change.
In this regard, the Securities and Exchange Commission has indicated that publicly traded exchanges should be treated as national stock exchanges, which would place them under the investor protection regime of securities laws.
Related: Senator Lummis: My proposal with Senator Gillibrand allows the SEC to protect consumers
However, the question of whether tokens currently listed on national exchanges are securities remains unanswered and is being vigorously contested in court. Coinbase insists it doesn’t list securities – end of story.
Tokens that are not securities would appear to fall under CFTC jurisdiction as commodities. However, the CFTC’s oversight authority extends only to commodity token derivatives markets and not to cash markets, including exchanges, where it only has investigative and enforcement powers. .
Using a comprehensive definition of “digital commodity,” Congress can create jurisdiction for the CFTC to oversee cash markets and address market concerns – such as investor disclosures, market transparency, fraud , manipulation and insider trading – present on stock exchanges. At the same time, it can establish unified licensing rules relating to the role of exchanges as depositories and payment providers.
A unified federal system to rule them all
As lawmakers from both parties pass federal crypto regulations, now is the time for Congress to act. We believe that a federal “digital goods” regime that, among other things, governs domestic cryptocurrency exchanges, should achieve at least three major goals.
First, it must clearly distinguish a “digital commodity” from a security by specifying that if an investment program involving digital assets (usually the initial sale) triggers the application of securities laws, the object of this program is more often a digital commodity rather than a security. This distinction highlights the novelty of blockchain technology: that tokens are intended to outlast their issuer and to be traded within the blockchain user community outside of any initial investment scheme.
Distinguishing digital commodities from securities in this way is not only correct from a securities law perspective, but also essential to maintaining a sustainable blockchain ecosystem in the United States. Treating parties engaged in standard business transactions involving tokens as broker-dealers would stifle user growth and lead to the delisting of many popular tokens like Axie Infinity (AXS) from Coinbase. The Gillibrand-Lummis bill is a draft proposal pending before Congress in which the text purports to decouple “ancillary assets” from their investment plans. This conceptual distinction is a step in the right direction.
Related: Federal regulators prepare to pass judgment on Ethereum
Second, a digital commodity trading regime overseen by the CFTC should provide consumers with meaningful protections appropriate for cryptocurrency trading. While treating tokens as securities and preventing them from circulating on the blockchain and trading on the secondary market in the United States would be fatal, failing to clearly and adequately address market abuse and manipulation in a valued industry at $3 trillion last year is similarly unacceptable. In this regard, the EU MiCA could be instructive.
Third and finally, any new digital product regime must not unduly burden industry players and respect their constitutional rights. In August, Senate leaders introduced the bipartisan Digital Consumer Protection Act of 2022, which seeks to regulate cryptocurrency exchanges as brokers, dealers, custodians, and trading facilities overseen by the CFTC. While this renewed attention from lawmakers was welcome, it raised new concerns about overbreadth and unintended consequences on constitutionally protected activities (e.g. publishing software and relaying transaction messages) and on people who only buy and sell cryptocurrencies for their own account.
The emergence of ambitious digital asset legislation, such as MiCA, gives the United States and its domestic industry the opportunity to learn from other countries’ legal approaches before they become the norm in the world. global scale. (MiCA won’t go into effect until 2024.) It’s also a reminder that the maturing blockchain industry is driving legal innovation in other markets. On the critical topic of regulating trade in digital commodities, the United States is not left behind, at least not yet, but it is undeniably catching up.
Chen Li is the CEO of Youbi Capital, a VC and digital asset accelerator.
Ivo Enchev is a blockchain lawyer and legal advisor to Youbi.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.