The Senate Banking Committee Provides an SEC-focused Crypto Market Structure Bill. Dylan Unruh, Dartmouth College.
Legislative Framework
Rather than invent a new asset class, as the CLARITY Act does, the Senate Banking Committee has opted to amend the Securities Act of 1933 to include digital commodities under definition of ancillary assets and define ancillary asset originators as the initial distributors of ancillary assets. An ancillary asset is often sold within an investment contract; however, the asset itself is not a security. Therefore, non-security based transactions, meaning most secondary transactions, are exempt from securities laws. The SEC is mandated to create a process, similar to the CLARITY Act’s maturity certification, for ancillary asset originators to apply for disclosure requirement exemptions. To standardize the application of securities laws to digital assets, the SEC will clarify the terms of an investment contract as well as modernize its mission to include innovation.
The draft introduces “Regulation DA” to create a four-year innovation-focused safe harbor for development stage companies that issue forward-looking statements to reach a state of no common control on their digital networks. No common control means the absence of a unilateral entrepreneurial or managerial authority in the network’s governance structure. Under Regulation DA, these companies can raise up to $75,000,000 while in the safe-harbor. The SEC maintains the authority to extend the exemption to these companies after four years or begin enforcement.
Measures to Stem Illicit Finance
The draft orders the Treasury Department to establish an examination process to assess financial institutions on anti-money laundering and reporting obligations with regards to digital assets. Furthermore, the Attorney General is to establish a pilot program in coordination with FinCEN, the DOJ, and Homeland Security to share information about illicit financial activity.
Digital asset experts will also be appointed to the newly established Independent Financial Technology Working Group to Combat Terrorism and Illicit Financing to help provide sanctions and anti-terrorism guidelines to the industry.
Key Regulatory Developments
In a significant development for digital asset providers, financial holding companies, national banks, and state banks are enabled to use digital assets or blockchain technology to fulfill any of their obligations or provide services as authorized by law. This includes custodial services, market making, payments, and digital network node operation. Moreover, customers can collateralize loans with digital assets providing new real-world utility to Bitcoin which has established itself a lucrative store-of-value.
To further clarify the role developers and service providers, particularly that of stablecoin issuers, the “Blockchain Regulatory Certainty Act” introduces the definition of “non-controlling developer or provider” which applies to any developer or provider who does not maintain common control over the transaction functions of the digital network. The Act exempts non-controlling developers or providers from money-transmitter registration requirements, allowing decentralized stablecoin issuers such as MakerDAO to potentially gain a regulatory edge over larger players such as Circle.
The draft will likely be synthesized with the Senate Agriculture Committee’s draft as well as the CLARITY Act. Although this draft doesn’t address the Trump family’s involvement in digital assets, as many democrats have wished for, bipartisan support of the CLARITY Act in the House shows such an amendment likely won’t be necessary. Overall, this draft seems to indicate that the Senate is moving in a pragmatic regulatory approach with their market structure bill.