House Financial Services Committee and Agriculture Committee Share Draft Digital Asset Legislation, Leverages Existing Exemptions, Proposes New “Tailored Exemption”

Under the leadership of Republicans, the US House of Representatives continues to push forward on financial services policy matters that aim to support Fintch innovation. Today, the Chair of the House Financial Services Committee, Patrick McHenry, and the Chair of the Committee on Agriculture, Glenn “GT” Thompson, have shared a discussion draft of legislation on digital assets.

Chairman McHenry issued the following statement on the legislation:

“This discussion draft is the first step toward delivering on Republicans’ commitment to develop clear rules of the road for the digital asset ecosystem, Our goal is to strike the appropriate balance between consumer protection and encouraging responsible innovation. This is the product of an unprecedented joint effort between the House Financial Services and Agriculture Committees, which gives us a better shot at striking that balance. I encourage stakeholders and market participants to provide constructive feedback to help us improve our legislation.”

Chairman Thompson said the two Committees have been working for months on the legislation to craft a framework for digital asset regulation.

“Today’s release of the discussion draft brings us one step closer to bringing regulatory certainty to these novel and emerging technologies. This historic joint effort with the House Committee on Financial Services aims to close existing authority gaps between the CFTC and SEC and bolster U.S. leadership in financial and technological innovation.”

The draft legislation focuses on digital assets that are either securities or commodities.  The proposal mentions current private securities exemptions, including Reg D, Reg A+, and Reg CF, and a “new tailored exemption.”

At the same time, the Commodity Futures Trading Commission (CFTC) will receive new jurisdiction over:

“…digital commodity cash or spot markets which occur on or with CFTC the new registered entities created in this Act: digital commodity exchanges, digital commodity dealers, and digital commodity brokers. This new authority complements the Commission’s existing anti-fraud and anti-manipulation authority over all cash or spot market commodity transactions, including cash or spot market transactions in digital assets.”

A CFTC-SEC Joint Advisory Committee on Digital Assets will be established.

The current language creates an exemption from the securities laws for an issuer’s sale of digital assets that meet the following conditions:

1) the issuer’s total sales of the digital asset over the prior 12 months do not exceed $75 million;

2) a non-accredited investor’s purchases of the digital asset from the issuer over the prior 12 months are less than the greater of 5% of the purchaser’s annual income or 5% of their net worth;

3) the purchaser does not own more than 10% of the units of the digital asset after the completion of the transaction; and

4) the transaction does not involve equity or debt securities.

A new certification may be made available for decentralized digital assets which meet the requirements of the legislation.

Digital commodities and payment stablecoins are excluded from the definition of a security under the securities laws.

The current language states that the SEC may not exclude a trading platform from operating pursuant to an exemption as an alternative trading system (ATS) “solely on the basis that the assets traded are digital assets. The SEC is also required to revise regulations to exempt ATSs that offer digital assets, digital commodities, and payment stablecoins from registration as a national securities exchange and revise the ATS framework to permit disintermediated trading and real-time settlement consistent with what is necessary or appropriate in the public interest or for the protection of investors.”

The SEC is also required to promulgate rules that allow for record-keeping on digital ledgers.

While non-fungible tokens (NFTs) are not part of the draft, there is a requirement to further study NFTs – managed by the US Department of Commerce.

The draft legislation aims to tackle a challenging topic that has flummoxed regulators for years. While the SEC claims that all digital assets are securities (except Bitcoin), industry participants have pushed back on this belief while touting the benefits of blockchain technology.

Most certainly, industry insiders have already provided counsel on the legislation, but by outing the bill, a far larger audience will have a chance to comment on the language and request changes or edits.

As the European Union and Hong Kong have recently approved new laws specifically designed for the digital asset industry, pressure is building for Congress to act.

The legislation is available below, and you may download it here.

A brief outline is available here.



 


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