Worried about being overtaken by Hong Kong? Understand the six key points of the US Financial Services Commission’s draft framework for the digital asset market.
Learn the six crucial points of the US Financial Services Commission's digital asset market draft framework to avoid being outpaced by Hong Kong.
Source: U.S. House of Representatives official website
Compiled by: BlockingNews
On June 1st, the “Guidelines for Virtual Asset Trading Platform Operators” officially took effect in Hong Kong. Just two days later, the Chairman of the U.S. House Financial Services Committee, Blockingtrick McHenry, and the Chairman of the House Agriculture Committee, Glenn “GT” Thompson, jointly released a draft discussion paper on digital asset market architecture, aimed at providing a legal regulatory framework for digital assets to further clarify regulatory gaps, promote innovation, and provide sufficient consumer protection. This article is the official summary of the “Digital Asset Market Structure Discussion Draft” released by the U.S. House Financial Services Committee, which comprehensively outlines digital asset classification, regulatory responsibilities, innovation and coordination, and regulatory transition measures from six aspects, as follows:
The current U.S. digital asset regulatory framework hinders innovation and fails to provide sufficient protection for consumers. The U.S. House Financial Services Committee and the House Agriculture Committee are addressing these issues by establishing a functional framework applicable to market participants and consumers, which will provide regulatory certainty for digital asset companies and fill regulatory gaps between the two major agencies, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
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The Digital Asset Market Architecture Discussion Draft proposes to give the Commodity Futures Trading Commission jurisdiction over digital commodities, while also clarifying the Securities and Exchange Commission’s jurisdiction over digital assets based on “investment contracts.” Moreover, the bill also stipulates the process by which the U.S. allows the trading of digital commodities on secondary markets, provided that the digital commodities were originally offered as part of an investment contract, and finally, the bill will impose strong customer protections on all entities that need to register with the Commodity Futures Trading Commission and the Securities and Exchange Commission.
I. Clear classification of whether digital assets are securities or commodities
The Digital Asset Market Structure Discussion Draft proposes to establish an information disclosure system based on the current exemption system for providing and selling digital assets based on investment contracts, to address potential risks associated with digital assets. Under the relevant exemption policies, digital asset issuers need to prove that their digital assets operate on a decentralized network and meet specific disclosure requirements. The bill stipulates that if certain conditions are met, digital assets can be considered digital commodities, depending on whether the network is operating normally and considered decentralized.
Furthermore, the bill defines the terms “decentralized network” and “functional network” and provides a certification process whereby a digital asset issuer can demonstrate to the United States Securities and Exchange Commission that a network related to a digital asset is decentralized. If the SEC determines that a digital asset issuer certified under the bill no longer meets its requirements, it may revoke that certification but must provide a detailed analysis of the reasons for the revocation.
Second, Regulatory Responsibilities of the SEC
The “Digital Asset Market Structure and Investor Protection Act” proposes that digital asset trading platforms be able to register as alternative trading systems (ATS). If a platform trading digital assets is granted an exemption to operate as an ATS, the SEC cannot reject its registration application. The bill also allows ATSs to offer digital commodities and use stablecoins for payment on their platforms and requires the SEC to modify its rules to permit broker-dealers to custody digital assets under certain conditions. On the other hand, the bill would require the SEC to adopt rules to ensure that certain digital asset regulations are adapted to the needs of modern markets.
Third, Regulatory Responsibilities of the CFTC
The “Digital Asset Market Structure and Investor Protection Act” proposes that the United States will create a framework for a Digital Commodity Exchange (DCE) similar to the existing trading frameworks for designated contract markets and swap execution facilities under the Commodity Exchange Act (CEA). A registered DCE would need to comply with the requirements of the “Digital Asset Market Structure and Investor Protection Act” and certain core principles of the CEA and CFTC regulations that have been in place for some time, such as trade surveillance, prohibition of abusive trading practices, minimum capital requirements, trading information reporting, trade conflict of interest, governance standards, and cybersecurity. A DCE must also register with the National Futures Association and if it provides services directly to customers, it must comply with the customer protection rules of the National Futures Association.
It should be noted that if a “digital commodity” is to be listed, the DCE must demonstrate to the CFTC that the relevant digital commodity will not be subject to manipulation prior to the commencement of trading and provide availability, structure, functionality, and public information.
According to the “Discussion Draft of the Digital Asset Market Structure” , a framework for digital commodity brokers (DCBs) and digital commodity dealers (DCDs) will be established. As these brokers and dealers provide services directly to customers, they must be registered with the US Futures Association and comply with regulatory commercial practices such as minimum capital, fair trading, risk disclosure, advertising restrictions, conflicts of interest, record keeping and reporting, and employee suitability standards.
The proposed bill also proposes to strengthen customer asset protection based on existing commodity market requirements for futures commission merchants (FCMs). Digital asset exchanges require customer assets to be segregated and stored with digital asset custodians, and these custodians must also comply with the minimum regulatory and comprehensive regulatory standards set by the US Commodity Futures Trading Commission. In addition, when a futures commission merchant acts as a counterparty, the bill specifically requires the futures commission merchant to provide bankruptcy protection for customers.
IV. Regulatory Coordination
The “Discussion Draft of the Digital Asset Market Structure” will allow a single entity to obtain multiple licenses from the US Commodity Futures Trading Commission, depending on the nature of the services provided by the entity, but will not allow exchanges to register directly as dealers. In addition, the bill will also allow certain entities to be dually registered with the US Commodity Futures Trading Commission and the US Securities and Exchange Commission to facilitate the trading of various types of digital assets.
V. Innovation and Coordination
The “Discussion Draft of the Digital Asset Market Structure” lists the work of the joint establishment of the Innovation and Financial Technology Strategy Center (FinHub) by the US Securities and Exchange Commission and the US Commodity Futures Trading Commission LabCFTC. These institutions will serve as information resource centers and service forums for the Financial Technology (FinTech) Innovation Committee, helping FinTech innovators to more easily access the US Commodity Futures Trading Commission and better understand its regulatory framework.
The bill also proposes the establishment of a joint digital asset advisory committee composed of 20 market participants, which will provide advice on digital assets to the US Securities and Exchange Commission and the US Commodity Futures Trading Commission. The bill requires the US Securities and Exchange Commission and the US Commodity Futures Trading Commission to conduct joint research on decentralized finance, and requires the US Department of Commerce to consult with the White House Office of Science and Technology, the US Securities and Exchange Commission, and the US Commodity Futures Trading Commission to conduct research on non-fungible digital assets (NFTs).
6. Regulatory Transition
The “Discussion Draft of the Digital Asset Market Structure and Investor Protection Act” mentions that a transitional period will be provided for relevant entities to ensure that they can “temporarily comply” with the regulations of the US Securities and Exchange Commission and the US Commodity Futures Trading Commission. At the same time, the bill requires the US Commodity Futures Trading Commission to develop final rules to comprehensively supervise the market. Existing digital assets are eligible for “safe harbor” protection, allowing these digital assets to be traded during the safe harbor protection period until the US Securities and Exchange Commission and the US Commodity Futures Trading Commission notify the trading platform that the relevant digital assets are not digital commodities.
