New Bill Proposes CFTC Should Regulate Spot Digital Currency Markets

The inevitable march towards overall regulation of the digital asset marketplace continues with the Digital Commodities Consumer Protection Act of 2022 (DCCPA). Entities in the business of trading, brokering, custodying, or acting as an exchange for digital assets should consider the implications of this important legislation, which may drastically change the way that they do business by applying a complete regulatory scheme on their previously unregulated businesses.

On August 3, 2022, U.S. Senators Debbie Stabenow (D, MI) and John Boozman (R, AR) of the Senate Agricultural Committee formally proposed a new bill to regulate the digital asset market. The proposed DCCPA would provide the Commodity Futures Trading Commission with expanded jurisdiction to oversee the spot digital currency markets. The CFTC's current regulatory jurisdiction only includes non-spot trades, such as options, futures, and other derivatives with anti-fraud jurisdiction over assets that are traded on a future basis.

The DCCPA would give the CFTC exclusive jurisdiction to regulate "digital commodity" trading, except for situations in which a digital commodity is being used for the purchase or sale of a good or service. The DCCPA defines "digital commodity" as a fungible digital form of personal property that can be directly transferred between owners without the need for an intermediary. It specifically includes Bitcoin and Ether and implicitly includes cryptocurrencies or virtual currency but excludes physical commodities, securities, or digital currency backed by the United States federal government. It appears that the DCCPA's definition of "digital commodity" would include Decentralized Autonomous Organizations (DAOs) but would not include non-fungible tokens (NFTs). The DCCPA also excludes from the definition of "digital commodity" stablecoins backed by the full faith and credit of the United States.

The DCCPA would require registration by a range of digital markets participants, collectively referred to in the bill as "digital commodity platforms." The DCCPA provides four new Commodity Exchange Act registration categories that would be regulated as a digital commodity platform: digital commodity brokers, digital commodity custodians, digital commodity dealers, and digital commodity trading facilities. Unlike many forms of CFTC registration, the DCCPA calls for multiple registration statuses such that vertically integrated business could have registrations in multiple platform categories. All digital commodity platform participants would need to comply with certain core principals, which bring them on par with similarly regulated participants, such as futures commission merchants, swap dealers, designated clearing organizations, and execution facilities. The entire digital platform, except for digital commodity transaction facilities, would need to become members of a registered futures association, most likely the National Futures Association unless a competitor emerges. The DCCPA does recognize that digital commodity platforms also could be registered with, and subject to regulation by, the SEC, which suggests that the question of whether a specific cryptocurrency is a commodity or a security may require resolution on a case-by-case basis.

The bill seeks to preempt state laws with respect to registration requirements for money transmission, virtual currency and commodity brokers. For example, registration as a digital commodity broker or dealer could preempt registration in New York as a virtual currency business. The DCCPA also establishes extraterritoriality by excluding activities outside of the United States unless they have a significant impact on the U.S., involve the solicitation of U.S. persons, or involve an office or business in the U.S. The DCCPA also seeks to amend the U.S. Bankruptcy Code by including digital commodity platform insolvencies in the same way that traditional CFTC registered entities are treated under the Bankruptcy Code. Among other things, the DCCPA includes provisions establishing that digital commodities held on a trading facility or at a custodian remains customer property, extends the Bankruptcy Code's safe harbor provisions that allow commodities and securities to be traded to include digital commodities, and would make the Bankruptcy Code's automatic stay and fraudulent transfer provisions inapplicable to digital commodities.

Additionally, the DCCPA includes language designed to enhance consumer protection, requiring the CFTC to adopt digital commodity consumer protection rules, which would dictate that digital commodity platforms disclose conflicts of interests to consumers and refrain from engaging in false, deceptive or misleading practices. The DCCPA also subjects digital commodity trading to the Bank Secrecy Act of 1970 and its anti-money laundering protections.

While regulation may be looming, this is an area still subject to regulatory uncertainties. One important factor will be the Senate Banking Committee's response as they cover the SEC which has expressed a high level of interest in the area as well.

 As with the previously proposed Lummis-Gillibrand Responsible Financial Innovation Act (the RFIA), the DCCPA, if enacted, would revolutionize the digital asset business by requiring participants to be registered in a manner similar to existing commodity businesses. Registration, testing, supervision, recordkeeping, capital, fairness, risk management, compliance, disqualification, examination, and enforcement will all be part of the landscape going forward. The DCCPA does seem to leave open the question of when a digital asset is a security and therefore not a digital commodity, but it does clarify that most non-fungible tokens would not be subject to CFTC jurisdiction, while most fungible cryptocurrencies would be. However, the similarities among the elements and spirit of the DCCPA and the RFIA appear to telegraph the direction of digital asset regulation in the United States, and, in any event, indicate that regulation is imminent.

Ballard Spahr's integrated team of securities and finance attorneys addresses the regulation of digital assets, transactions involving digital assets, litigation concerning digital assets, and insolvency claims relating to digital assets. Please contact us for more information.