Afraid of being surpassed by Hong Kong? Six key points to understand the U.S. Financial Services Committee's digital asset market framework draft

Source: Official Website of the U.S. House of Representatives

Compiled by: Jordan, PANews

On June 1, the "Guidelines for Virtual Asset Trading Platform Operators" in Hong Kong officially came into effect. Just two days later, Patrick McHenry, Chairman of the House Financial Services Committee, and Glenn "GT" Thompson, Chairman of the House Agriculture Committee, jointly released a discussion draft on the digital asset market structure aimed at providing a statutory regulatory framework for digital assets to further clarify regulatory gaps, promote innovation, and provide adequate consumer protection. This article is the official summary of the "Digital Asset Market Structure Discussion Draft" released by the House Financial Services Committee, comprehensively outlining the classification of digital assets, regulatory responsibilities, innovation and coordination, as well as regulatory transition measures from six aspects, as follows:

The current regulatory framework for digital assets in the United States hinders innovation and fails to provide adequate protection for consumers. The 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 Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).

The discussion draft of the digital asset market structure aims to grant the CFTC jurisdiction over digital commodities while also clarifying the SEC's jurisdiction over digital assets based on "investment contracts." Furthermore, the bill outlines the process for allowing digital commodities to be traded on the secondary market in the U.S., provided that the digital commodities were initially offered as part of an investment contract. Finally, the bill will implement strong customer protections for all entities required to register with the CFTC and the SEC.

1. Clear Classification of Digital Assets as Securities or Commodities

The "Digital Asset Market Structure Discussion Draft" aims to build on the existing exemption system for the offering and sale of digital assets based on investment contracts and includes an information disclosure system to address potential risks associated with digital assets. According to relevant exemption policies, issuers of digital assets must demonstrate 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 may be considered digital commodities, depending on whether the network is functioning properly and is deemed decentralized.

Additionally, the bill clarifies the definitions of "decentralized network" and "functional network" and provides a certification process through which digital asset issuers can demonstrate to the SEC that the network associated with the digital asset is decentralized. If the SEC determines that the certifying digital asset issuer does not comply with the bill, it may deny recognition but must provide a detailed analysis explaining the reasons for the denial.

2. Regulatory Responsibilities of the SEC

The "Digital Asset Market Structure Discussion Draft" states that digital asset trading platforms should be able to register as Alternative Trading Systems (ATS). If a platform trading digital assets is exempt, it can operate as an ATS, and the SEC cannot reject the platform's registration application. The relevant bill will also allow ATS to offer digital commodities on their platforms and use stablecoins for payments, requiring the SEC to amend 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 adapt to the needs of modern market developments.

3. Regulatory Responsibilities of the CFTC

The "Digital Asset Market Structure Discussion Draft" proposes that the U.S. will create a Digital Commodity Exchange (DCE) framework, similar to the existing trading framework for designated contract markets and swap execution facilities under the Commodity Exchange Act (CEA). For a registered digital commodity exchange, compliance with the requirements of the "Digital Asset Market Structure Discussion Draft," as well as certain long-standing core principles of the CEA and CFTC regulations, is required, including trade activity monitoring, prohibition of abusive trading practices, minimum capital requirements, trade information public reporting, conflict of interest in trading, governance standards, and cybersecurity. Digital commodity exchanges must also register with the National Futures Association, and if they provide services directly to customers, they must comply with customer protection rules of the NFA.

It is important to note that if "digital commodities" need to be listed, the digital commodity exchange must demonstrate to the CFTC that the relevant digital commodities will not be manipulated before trading begins, while providing availability, structure, function, and public information.

The "Digital Asset Market Structure Discussion Draft" also proposes the creation of a Digital Commodity Broker (DCB) and Digital Commodity Dealer (DCD) framework. Since they provide services directly to customers, both digital commodity brokers and dealers must register with the NFA and meet normative business conduct requirements related to minimum capital, fair trading, risk disclosure, advertising restrictions, conflict of interest, record-keeping and reporting, and daily trading record standards.

The proposed bill also suggests strengthening customer asset protection based on existing commodity market requirements imposed on Futures Commission Merchants (FCM). Digital commodity exchanges are required to segregate customer assets, which must be held by digital commodity custodians, who must also be subject to minimum regulatory and comprehensive oversight standards established by the CFTC. Additionally, when an FCM acts as a counterparty, the bill explicitly requires the FCM to provide bankruptcy protection for customers.

4. Regulatory Coordination

The "Digital Asset Market Structure Discussion Draft" will allow a single entity to obtain multiple licenses from the CFTC, depending on the nature of the services the entity provides, but will not allow exchanges to register directly as dealers. Furthermore, the bill will permit certain entities to dual-register with both the CFTC and the SEC to facilitate the trading of various types of digital assets.

5. Innovation and Coordination

The "Digital Asset Market Structure Discussion Draft" outlines the collaborative efforts of the SEC and the CFTC's LabCFTC in establishing an Innovation and Financial Technology Strategic Center (FinHub). These agencies will serve as information resource centers and service forums for FinTech innovators, helping them more easily access the CFTC and better understand the CFTC's regulatory framework.

The bill also proposes the establishment of a Joint Advisory Committee on Digital Assets, composed of 20 market participants, which will provide advice related to digital assets to the SEC and the CFTC. The bill requires the SEC and the CFTC to conduct joint research on decentralized finance and mandates the Department of Commerce to consult with the White House Office of Science and Technology, the SEC, and the CFTC to study non-fungible tokens (NFTs).

6. Regulatory Transition

The "Digital Asset Market Structure Discussion Draft" mentions providing a transition period for relevant entities to ensure they can "temporarily comply" with the regulations of the SEC and the CFTC. At the same time, the bill requires the CFTC to develop final rules for comprehensive market oversight. Existing digital assets are eligible for "safe harbor" protection, allowing these digital assets to trade during the "safe harbor" period until the SEC and the CFTC notify trading platforms that the relevant digital assets are not digital commodities.