Worried about being surpassed by Hong Kong? Understand the six key points of the U.S. Financial Services Commission’s draft framework for the digital asset market.
Understand the six key points in the U.S. Financial Services Commission's draft proposal for digital asset markets if you're concerned about being overtaken by Hong Kong.
Author: Official website of the US House of Representatives; Compilation: BlockingNews
On June 1st, the “Guidelines for Virtual Asset Trading Platform Operators” in Hong Kong officially took effect. Just two days later, the Chairman of the US House Financial Services Committee, Blockingtrick McHenry, and the Chairman of the House Agriculture Committee, Glenn “GT” Thompson, jointly released a draft discussion on the digital asset market structure, 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 an official summary of the “Digital Asset Market Structure Discussion Draft” released by the US House Financial Services Committee, which comprehensively describes digital asset classification, regulatory responsibilities, innovation and coordination, and regulatory transition measures from six aspects, as follows:
The current US digital asset regulatory framework hinders innovation and fails to provide sufficient consumer protection. The US 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 the regulatory gaps between the two major institutions, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) in the United States.
The Digital Asset Market Structure Discussion Draft proposes to give the CFTC jurisdiction over digital commodities, while also clarifying the SEC’s jurisdiction over digital assets based on “investment contracts.” Moreover, the bill also stipulates the process for the United States to allow the trading of digital commodities on secondary markets, provided that the digital commodities were originally provided as part of an investment contract. Finally, the bill will also impose strong customer protection on all entities that need to register with the CFTC and SEC in the United States.
I. Clear classification of whether digital assets are securities or commodities
The “Digital Asset Market Structure Discussion Draft” is proposed to be based on the current exemption system for offering and selling digital assets based on investment contracts, and also includes an information disclosure system 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 treated as digital commodities, but this depends on whether the network is operating normally and is considered decentralized.
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Additionally, the bill defines “decentralized networks” and “functional networks” and provides an authentication process whereby digital asset issuers can prove to the US Securities and Exchange Commission that a network related to digital assets is decentralized. If the SEC determines that a certified digital asset issuer does not comply with the bill, it may refuse to certify but must provide a detailed analysis of the reasons for refusal.
2. Regulatory Responsibilities of the US Securities and Exchange Commission
The “Digital Asset Market Structure and Investor Protection Act” states that digital asset trading platforms should be able to register as Alternative Trading Systems (ATS). If a platform for trading digital assets is exempt and can operate as an alternative trading system, the US Securities and Exchange Commission cannot refuse the registration application of the platform. The relevant bill will also allow alternative trading systems to offer digital commodities on their platforms and use stablecoins for payment, and will require the SEC to modify its rules to allow broker-dealers to custody digital assets under certain conditions. On the other hand, the bill will require the SEC to develop rules to ensure that certain digital asset regulations are adapted to the needs of modern market development.
3. Regulatory Responsibilities of the US Commodity Futures Trading Commission
The “Digital Asset Market Structure and Investor Protection Act” proposes that the US create a digital commodity exchange (DCE) framework, similar to the existing trading framework for designated contract markets and swap execution facilities under the US Commodity Exchange Act (CEA). For a registered digital commodity exchange, it needs to comply with the requirements of the “Digital Asset Market Structure and Investor Protection Act”, certain core principles of the US Commodity Exchange Act, and regulations of the US Commodity Futures Trading Commission, such as trading activity monitoring, prohibition of abusive trading behavior, minimum capital requirements, trading information public reporting, trading conflicts of interest, governance standards, and network security, the digital commodity exchange must also be registered with the US Futures Association, and if it directly provides services to customers, it must comply with the customer protection rules of the US Futures Association.
It should be noted that if a “digital commodity” needs to be listed, the digital commodity exchange must prove to the US Commodity Futures Trading Commission that the relevant digital commodity will not be artificially manipulated before trading starts, and provide availability, structure, functionality, and public information.
The “Discussion Draft of the Digital Asset Market Structure” also proposes to create a framework for digital commodity brokers (DCBs) and digital commodity dealers (DCDs), both of which must be registered with the US Futures Association because they provide services directly to customers. They must also meet regulatory business behavior requirements related to minimum capital, fair trading, risk disclosure, advertising restrictions, conflicts of interest, record keeping and reporting, daily trading records, 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 commodity exchanges require that customer assets be segregated and stored in digital commodity custodians, and relevant custodians must also be bound by the minimum regulatory and comprehensive regulatory standards established by the US Commodity Futures Trading Commission. In addition, when a futures commission merchant acts as a counterparty, the bill specifically requires that the futures commission merchant provide bankruptcy protection to 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 registered with both the US Commodity Futures Trading Commission and the US Securities and Exchange Commission to facilitate the trading of multiple types of digital assets.
V. Innovation and Coordination
The “Discussion Draft of the Digital Asset Market Structure” lists the relevant work of the US Securities and Exchange Commission and the US Commodity Futures Trading Commission’s LabCFTC in jointly establishing the Innovation and Financial Technology Strategic Center (FinHub). These institutions will serve as information resources and service forums for the Financial Technology (FinTech) Innovation Committee, helping FinTech innovators to more easily access the US Commodity Futures Trading Commission, and thus better understand the regulatory framework of the US Commodity Futures Trading Commission.
The bill also proposes the establishment of a digital asset joint advisory committee composed of 20 market participants jointly appointed by the US Securities and Exchange Commission and the US Commodity Futures Trading Commission to 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 negotiate with the White House Technology Office, the US Securities and Exchange Commission, and the US Commodity Futures Trading Commission to conduct research on non-fungible digital assets (NFTs).
Six, Regulatory Transition
The “Digital Asset Market Framework Discussion Draft” mentioned that a transitional period will be provided for relevant entities to ensure that entities 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 fully supervise the market. Existing digital assets are eligible for “safe harbor” protection, which allows 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.
