Decentralized cryptographic ledgers — immutable lists of transactions that require no central authority for verification — are estimated to hold approximately $251.8 billion US dollars as of March 2020. The most well-known of these cryptographic ledgers is the Bitcoin blockchain. It records when people buy and sell Bitcoins, storing these records in groups of transactions called “blocks” that are linked together in a series of immutable, time-stamped records of transaction.
Similar to how there are many types of traditional financial investments (e.g., currencies, stocks, bonds, and mutual funds), there are multiple types of crypto-based digital assets that people can invest in. As more types of digital assets are invented, it has become unclear how they should be regulated and by which federal agency.
In response, Representative Gosar (R-AZ-4) introduced the “Crypto-Currency Act of 2020” in March 2020. If enacted, the Crypto-Currency Act would specify which federal agencies are primarily responsible for regulating three types of digital assets held on decentralized cryptographic ledgers (DCLs):
- Crypto-commodities: The Commodity Futures Trading Commission (CFTC) would be in charge of regulating crypto-commodities. Commodities are economic goods, services, or derivatives of these products that have essentially the same value regardless of their producer (e.g., one farmer’s bushel of wheat is undistinguishable from another’s). What makes a commodity a crypto-commodity is the fact that it is held on a DCL (e.g., a blockchain).
- Crypto-securities: The Securities and Exchange Commission (SEC) would be in charge of regulating all crypto-securities and synthetic stablecoins. A security is a financial instrument, such as a stock or bond, that holds monetary value. When it is traded on a DCL, it is called a crypto-security. A synthetic stablecoin is a type of derivative — a security whose value is dependent on the value of an underlying asset (e.g., stock, bond, currency) — that is held on a DCL. Though they are a type of synthetic stablecoin, the bill excludes reserve-backed stablecoins — stablecoins backed dollar-for-dollar by US or foreign currency deposited in a bank or savings institution ensured by the Federal Deposit Insurance Corporation (FDIC) — from the synthetic stablecoins regulated by the SEC. They also exclude synthetic derivatives that are registered with the Treasury Department as “money services businesses” and are compliant with the Bank Secrecy Act and federal anti-money, anti-laundering, anti-terrorism, and screening requirements from the SEC’s regulation. Nevertheless, the term synthetic derivative is never explicitly defined in the bill, an omission that opens the doors to ambiguity in implementation according to commentators.
- Crypto-currencies except synthetic stablecoins: The Financial Crimes Enforcement Network (FinCEN) and the Office of the Comptroller of the Currency (OCC) would be jointly in charge of regulating all crypto-currencies except synthetic stablecoins. The bill defines crypto-currencies as digital representations or derivatives of US currency held on a DCL. The most well-known digital assets, Bitcoins, are an example of a crypto-currency. Smart-contracts – computer programs that allow people to verify and follow through on financial agreements without needing an outside party to facilitate – are also classified as crypto-currencies, as long as they use crypto-commodities, crypto-currencies, or crypto-securities as collateral.
This bill aims to make information about creating and trading these digital assets more accessible to the public by requiring:
- Exchanges that trade in crypto-currencies and crypto-commodities to register with their respective regulatory agency.
- The regulatory agencies governing these three digital assets to maintain both a public list of all exchanges for the digital asset they regulate and a “list of all Federal licenses, certifications, or registrations required to create or trade” the digital asset.
- FinCEN to (a) create rules requiring all crypto-currencies (synthetic stablecoins included) to be able to trace their transactions and the people involved in them in a manner similar to how traditional financial institutions trace transactions and (b) audit reserve-backed stablecoins to ensure that issuers have enough resources to back their stablecoins dollar-for-dollar with US or foreign government-issued currency.
- The agencies that govern synthetic and reserve-backed stablecoins to notify both the stablecoin issuer and the American public if there is an event that causes a reserve-backed stablecoin to become a synthetic stablecoin (i.e., become a coin that is not matched dollar-for-dollar with a US or foreign government-issued currency) or vice versa.
After Facebook published a whitepaper outlining its plans for a new global stablecoin called Libra, lawmakers and regulatory agencies have been pushing for more clarity in crypto-currency regulation. The Crypto-Currency Act of 2020 is the latest of many bills introduced this past year, such as the more narrowly-scoped Token Taxonomy Act, that attempt to enact regulations on the crypto-currency industry.
When drafting this bill, Congressman Gosar’s office was advised by two crypto-currency entrepreneurs. However, upon the bills’ introduction, it was not received well by many in the industry. The Executive Directors of DC-based blockchain non-profits the Blockchain Association and Coin Center opposed the bill, declaring it “dead on arrival” and saying that the bill “should be opposed on principle.” Critics of the bill worry that the bill’s simple broad definitions do not capture how blockchain technologies are used in real life, and the bill’s omission of a definition for “synthetic derivative” leaves subsequent key definitions ambiguous. They fear that “any effort of legislation has to take into account future innovation in the space and what else happens in the coming years. It’s not good to bet on a horse race if you don't know the players.”