Industry reps suggest improvements to Stabenow-Boozman crypto regulation bill

September 15, 2022 Coin Telegraph

CFTC

The crypto spokespeople testified before the Senate Agriculture Committee on Thursday with analyses of the bill’s strengths and recommendations for its weaknesses.

Representatives of the crypto community shared their responses to the proposed Digital Commodities Consumer Protection Act (DCCPA) on Sept. 15. Speaking at the second panel of a hearing held by the Senate Agriculture Committee, invited speakers praised the bill as a whole, but had recommendations for improvement.

Definitions were an issue for all five of the speakers and Blockchain Association head of policy Jake Chervinsky, who released a statement on the bill within moments of the conclusion of the hearing. All the commenters expressed a desire for a clearer definition of securities and commodities.

“While the bill includes a carve-out for securities, it does not explicitly define what is or is not a security (through the application of the Howey test or otherwise),” Coinbase vice president and deputy general counsel Christine Parker said.

Crypto Council for Innovation CEO Sheila Warren said:

“The bill leaves it to the agencies and the Courts to determine whether a digital asset, other than Bitcoin and Ether, is a security or not. To date, this approach has not worked well, with significant implications for consumers.”

Center for American Progress director of financial regulation and corporate governance Todd Phillips said that the bill’s definition of commodities does not take into account the role of miners and stakers.

In addition, Warren said, “The bill limits brokers, dealers, and trading facilities to transacting only in "transactions" or "digital commodities" that are not "readily susceptible to manipulation," but it does not attempt to define what "readily susceptible to manipulation" means.”

Citadel Securities chief legal officer and former Commodity Futures Trading Commission (CFTC) chair Heath Tarbert found the descriptions of required registrants under the bill to be overly broad. He also favored an explicit ban on rulemaking by enforcement:

“While the CFTC has not typically engaged in rulemaking by enforcement, it is important for Congress to make its intent on this point crystal clear.”

Chervinsky was concerned that the definition of “digital commodity platform” was too broad and could impose “onerous requirements on some firms that aren’t justified by the minimal degree of risk they pose.” He also saw threats to privacy in the requirements for those platforms.

1/ The Senate Agriculture Committee (@SenateAgDems & @SenateAgGOP) held an important hearing today on the Digital Commodities Consumer Protection Act (DCCPA), a bill to regulate crypto spot markets.

It's a good bill, but it needs some work. Here's why.
— Jake Chervinsky (@jchervinsky) September 15, 2022

The speakers had a variety of concerns about the scope of the bill as well. The bill needs specifications to limit the authority of the CFTC to avoid regulating transactions that do not take place in the United Stat, according to Warren and Chervinsky.

The bill also “could be interpreted as a ban on decentralized finance (DeFi),” Chervinsky said. Warren echoed that point, saying the bill had provisions that are “unworkable” for DeFi. Stellar Development Foundation CEO and executive director Denelle Dixon made the point that “some could interpret the text to cover aspects of the technology rather than the participants offering products and services that leverage the technology.”

The DCCPA was introduced by Agriculture Committee chair Debbie Stabenow and ranking member John Boozman on Aug. 3. This was the first hearing on the bill, which is unlikely to be passed during this Congress.

Merge is ‘a step in the right direction’ to address crypto’s energy usage — Rostin Behnam

September 15, 2022 Coin Telegraph

CFTC

The CFTC chair said that the Ethereum blockchain’s transition to proof-of-stake, despite reducing energy usage by more than 99%, may not go far enough in resolving the problem.

Rostin Behnam, chair of the United States Commodity Futures Trading Commission, or CFTC, said the Ethereum blockchain’s transition to proof-of-stake may help reduce crypto’s energy usage, but hinted legislation would likely still be needed to address the problem.

Speaking at a Thursday hearing before the Senate Agriculture Committee, Behnam addressed a question from Minnesota Senator Amy Klobuchar, who brought up the environmental impact of the “significant energy” required of mining cryptocurrencies. Without mentioning the Merge by name, the CFTC chair said the crypto bill currently being considered by lawmakers would require a report on energy usage that could lead to future policy discussion and “incentives to move away from carbon-intensive energy sources.”

“We’ve all heard the statistics about the amazing amount of energy used to mine coins,” said Behnam. “I would say that an event occurred last night with Ethereum which is going to reduce energy consumption — a step in the right direction, but certainly not resolving the problem.”

*CFTC chair Rostin Behnam addressing the Senate Agriculture Committee on Thursday*

In his written testimony, Behnam said he was in favor of passing the Digital Commodities Consumer Protection Act, legislation aimed at expanding the CFTC’s authority over the crypto market, adding the regulatory body had the “expertise and experience” to be the “regulator for the digital asset commodity market.” According to the CFTC chair, many of the criticisms around the crypto space — focusing on fraud and scams — could be addressed by giving the agency “a lens into the trading platform” rather than relying on users to bring enforcement cases.

“[The bill] would provide the authority to the CFTC to regulate markets. This volatility, the fraud, the manipulation — much of it would probably go away because we now have a regulator, a cop on the beat, and this would deter activity by bad actors.”

The Ethereum Merge took place on Thursday, marking the blockchain’s transition from proof-of-work to proof-of-stake and effectively cutting the network’s energy consumption by an estimated 99.95%. The price of Ether (ETH) fell under $1,500 in the hours following the event, with Cointelegraph reporting many crypto minted nonfungible tokens with a Merge theme.

Crypto bill needs clarification on ‘digital commodity’ — Sheila Warren

September 15, 2022 Coin Telegraph

CBDC

CCI CEO Sheila Warren said that there was “a very tight window” to pass the crypto bill given the possible change in leadership following the 2022 Midterm Elections.

Sheila Warren, CEO of the Crypto Council for Innovation, said the Digital Commodities Consumer Protection Act currently being considered by U.S. lawmakers was a “pivotal step” towards achieving regulatory clarity, but recommended changes to determine the role authorities will take on digital assets.

In written testimony for a Wednesday hearing on the bill with the Senate Agriculture Committee, Warren said the proposed legislation needed to better define a “digital commodity” and security rather than leaving the matter to regulatory agencies or U.S. courts. According to the Crypto Council CEO, the Digital Commodities Consumer Protection Act also fell short of clarifying what trading activity was allowed based on that “readily susceptible to manipulation,” making it possible the Commodity Futures Trading Commission, or CFTC, could have its own interpretation in contrast with that of the Securities and Exchange Commission, or SEC.

“The bill leaves it to the agencies and the Courts to determine whether a digital asset, other than Bitcoin and Ether, is a security or not,” said Warren. “To date, this approach has not worked well, with significant implications for consumers, and is why the industry has made numerous calls for proactive regulation, rather than regulation by enforcement.”

Speaking to Cointelegraph, Warren said the bill, if passed, would grant the CFTC broad authority over the crypto spot market. She said that additional legislation and regulatory processes would likely be required to clarify the SEC’s role — a sentiment recently echoed by chair Gary Gensler — adding there was “a very tight window” to pass such laws given the possible change in leadership following the 2022 Midterm Elections.

“We very strongly feel that any crypto legislation should be bipartisan in nature.”

Warren added in her written statement that the CCI supported provisions within the bill aimed at establishing consumer protection standards such as transparency requirements for financial tools and products in the crypto and blockchain space. The legislation also requires a report on underserved communities involved with digital assets.

As the former head of data, blockchain and digital assets at the World Economic Forum, Warren explored central bank digital currencies and promoted the adoption of blockchain technology, leaving in February to become the Crypto Council for Innovation’s CEO. Formed in April 2021, the CCI’s supporters include Coinbase, Gemini, Fidelity Digital Assets, Paradigm, Ribbit Capital, Andreessen Horowitz and Block. The organization has focused on supporting issues related to using cryptocurrencies and harmonizing related regulations in the United States and Europe.

SEC chair Gensler holds tight to his crypto position in preview of Senate testimony

September 14, 2022 Coin Telegraph

CFTC

The official will testify before the Senate Committee on Banking on Sept. 15; in a transcript released early, he reiterates the primacy of securities law in crypto regulation.

United States Securities and Exchange Commission chairman Gary Gensler is scheduled to testify before the U.S. Senate Committee on Banking, Housing, and Urban Affairs in a hearing titled “Oversight of the U.S. Securities and Exchange Commission” on Sept. 15. The transcript of his speech was released in advance.

Gensler called securities laws a “gold standard” of capital markets. In his 13-page comprehensive discussion of those markets, crypto markets took up about a page and a half, including footnotes.

Per a @BankingGOP aide on @GaryGensler Thursday hearing: "Expect @SenToomey and @BankingGOP to argue that Chairman Gensler’s pursuit of a highly politicized liberal policy agenda has distracted him from fulfilling the @SECGov core mission of protecting investors, maintaining
— Eleanor Terrett (@EleanorTerrett) September 13, 2022

Gensler restated his belief that most cryptocurrencies are securities. Since that is so, he has asked SEC staff to “work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities.” He continued that many intermediaries, such as exchanges, broker-dealers, and those with custodial functions, deal in securities and should be registered with the SEC “in some capacity.” In addition, he said:

“Given the nature of crypto investments, I recognize that it may be appropriate to be flexible in applying existing disclosure requirements.”

Stablecoins, Gensler said, “may be shares of a money market fund or another kind of security,” and therefore also require registration and regulation.

Gensler acknowledged the entry of traditional financial firms into the crypto space and said they are interested in entering “in compliance with time-tested investor protection rules,” which existing intermediaries should follow as well to ensure a level playing field. He added that he has instructed his staff to look for ways security and non-security cryptos can trade together.

Gensler noted that “crypto intermediaries may need to one day register with both the SEC and the Commodity Futures Trading Commission (CFTC),” and there are already dual registrants.

Gensler’s testimony was originally scheduled for Sept. 14, but was rescheduled for the following day. Gensler will deliver his speech at roughly the same time as CFTC chairman Rostin Behnam and several representatives of the crypto industry speak before the Senate Agriculture Committee on the proposed Digital Commodities and Consumer Protection Act. That bill is seen as favorable to the CFTC in relation to the SEC.

Gensler has been repeatedly criticized both for his agency’s unhelpful approach to crypto asset regulation and for its lack of action against industry participants.

Sen. Lummis: My legislation would empower the SEC to protect consumers

September 8, 2022 Coin Telegraph

CFTC

Lummis-Gillibrand would allow the SEC to figure out which cryptocurrencies fall under its regulatory purview, leaving the rest to the CFTC.

The United States has been the global financial leader since World War II when the U.S. dollar became the world reserve currency. Consequently, Americans have enjoyed benefits like greater buying power, easier access to capital and low-interest rates—including on our national debt.

Unfortunately, we face a growing threat to that dominance, from our national debt on the one hand and China’s ascendance and their own digital currency on the other. If the U.S. dollar lost its position as the world reserve currency, it would mean higher U.S. interest payments, more expensive debt repayments and a skyrocketing deficit.

The best time to address a crisis is before it begins and the United States still has the opportunity to right our fiscal ship and set ourselves on course for continued financial leadership.

I believe digital assets are the place to start. Decentralized digital assets, like Bitcoin (BTC), offer users a way to invest in a store of value that governments cannot inflate away. The ledger technology undergirding it, called blockchain, has many incredible applications, from currency to tracking shipping and enabling smart contracts.

Runaway inflation is a government-made disaster (and not just our government is guilty). Deny and debase is the central planning policy we are seeing play out before our very eyes.
— Cynthia Lummis (@CynthiaMLummis) July 26, 2022

Since 2018, I’ve watched my home state of Wyoming become the national leader in digital asset regulation, giving innovators regulatory room to experiment while protecting consumers from scammers.

As a former state treasurer, I am excited by the possibilities of incorporating digital assets into the American financial system. I’ve been encouraged to see almost universal agreement from regulators, politicians and the digital asset industry that it’s time to bring digital assets into the regulatory perimeter. After last summer’s digital asset debate during consideration of the infrastructure bill, I believe it’s time to have a holistic conversation about how we want to bring in digital assets.

I partnered with Senator Kirsten Gillibrand to introduce the Responsible Financial Innovation Act as an opening salvo in our federal discussion about digital assets. It’s a holistic way to retain American financial leadership while safely incorporating innovation into our financial system.

As I see it, a handful of key things must be addressed to accomplish this goal. If we can come together to address these issues, we would give American innovators the regulatory certainty they need to keep driving our financial revolution while also protecting consumers from bad actors.

It starts with definitions. We set out generally applicable definitions for the digital asset industry and for regulators to understand and use. Before the introduction of the Lummis-Gillibrand Digital Asset Framework, these definitions did not exist in federal law. Innovators will know which laws they must follow, and regulators will have the guidance to treat different assets appropriately.

Clear definitions would remove unnecessary restrictions and nonsensical regulations, like those blocking people from investing in Bitcoin (BTC) and other digital assets for their retirement or those requiring digital asset miners and others from being forced to provide the IRS with user information they don’t have.

It is the duty of Congress to give authority to federal agencies. The Lummis-Gillibrand Digital Asset Framework allows the Securities and Exchange Commission to decide when a digital asset is a security like a stock or a commodity like gold. Meanwhile, the Commodity Futures Trading Commission will be allowed to regulate the spot market.

But this isn’t just about innovators. Congress must protect consumers, and Lummis-Gillibrand does just that. We must require innovators to provide potential customers with the information they need to make sound investment decisions. We must also give regulators the ability to punish scammers. Our plan protects consumers without stifling innovation.

We also recognize that discussions of stablecoins and central bank digital currencies are ongoing. The Responsible Financial Innovation Act does not provide for a central bank digital currency but addresses the issue of stablecoins. Banks should be able to issue stablecoins, and Congress must follow Wyoming’s example and require that these be 100% reserved. This policy works in the Cowboy State, and we should bring that protection to the federal level.

The Lummis-Gillibrand Digital Asset Framework would do all of these things. While we are only at the beginning of our congressional conversation about digital assets, I believe our bill will provide Congress with an appropriate next step as we move from theoretical to actual digital asset legislation. Ultimately, we must act. Doing so will help cement American financial leadership for years to come.

Sen. Cynthia Lummis is a Republican first elected to the United States Senate from Wyoming in 2020. She served previously as its U.S. representative from 2009–17 and as its state treasurer from 1999–2007.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

CFTC and SEC open comments for proposal to amend crypto reporting rules for large hedge funds

September 1, 2022 Coin Telegraph

CFTC

The public was invited to comment on whether the regulators should use the term “crypto asset” instead of “digital asset" in proposed changes to Form PF.

The United States Securities and Exchange Commission, or SEC, and the Commodity Futures Trading Commission, or CFTC, have called for comments on a proposal which would require large advisers to certain hedge funds to report exposure to crypto.

In a joint proposed rule published to the Federal Register on Sept. 1, the SEC and CFTC established a 40-day comment period for amendments to Form PF, the confidential reporting document for certain investment advisers to private funds of at least $500 million. The proposal suggested qualifying hedge funds report exposure to crypto in a different category other than “cash and cash equivalents,” as the current iteration of Form PR does not specifically mention cryptocurrencies.

Members of the public have until Oct. 11 to submit comments regarding the proposed changes, which the two regulators first introduced on Aug. 10. At the time, the SEC and CFTC cited the growth in the hedge fund industry as the reason for the proposed change, due in part to crypto investments becoming more common since Form PF was introduced following the 2008 financial crisis.

Among the suggested changes to Form PF included a definition of “digital assets,” potentially requiring certain hedge funds to report earnings based on investments in “virtual currencies”, “coins”, or “tokens” depending on the framework. The public was invited to comment on whether the regulators should use the term “crypto asset” instead of “digital asset.”

“We view these terms as synonymous,” said the proposal. “We are proposing the term and definition to be consistent with the SEC's recent statement on digital assets, and we believe that such term and definition would provide a consistent understanding of the type of assets we intend to address.”

The two regulators claimed that, if implemented, the proposal could allow investment advisers to provide more detailed information on strategies and exposure to certain assets, which would allow the Financial Stability Oversight Council to better assess potential risks to the economy. U.S. lawmakers are also currently considering different legislative approaches that aim to better establish the SEC’s and CFTC’s role in regulating crypto.

Former CFTC commissioner Jill Sommers joins FTX US Derivatives board

September 1, 2022 Coin Telegraph

CFTC

The addition of Jill Sommers followed former CFTC commissioner Mark Wetjen becoming FTX US' head of policy and regulatory strategy in November 2021.

Jill Sommers, who served as a commissioner at the United States Commodity Futures Trading Commission, has joined the board of directors for FTX US Derivatives.

In a Thursday announcement, crypto exchange FTX US’ derivatives arm said Sommers had become its latest board member in a move seeming to increase the company’s regulatory efforts. Sommers served as a CFTC commissioner from 2007 to 2013 under former Presidents Barack Obama and George W. Bush and was the managing director of regulatory affairs for the Chicago Mercantile Exchange.

According to Sommers, FTX US Derivatives aimed to become “the most regulated digital asset exchange in the world.” She said the board would work closely with regulators, suggesting discussions with the CFTC and others within the United States government.

“Adding Jill's wealth of experience in the derivatives landscape is an invaluable resource for our board as we traverse through the evolving digital asset ecosystem and its integration into the broader financial market structure,” said FTX US Derivatives CEO Zach Dexter.

Sommers’ addition to the board followed former CFTC commissioner Mark Wetjen joining FTX US as the firm’s head of policy and regulatory strategy in November 2021. Wetjen, who served as a commissioner from 2011 to 2015 and acting chair in 2014, has previously supported legislative efforts by the crypto exchange connected to expanding the CFTC’s authority. FTX US has proposed amending its clearing house license to include margined crypto-based products without intermediaries.

Excited to welcome former CFTC commissioner and former colleague, Jill Sommers, to the FTX US Derivatives board! Jill brings impressive governance and policy experience to the FTX team and I'm honored to have her as a direct colleague again! https://t.co/AAjvOX0nFu
— Mark Wetjen (@MarkWetjen) September 1, 2022

Members of Congress have several pieces of legislation that aim to provide regulatory clarity for crypto offerings, whether that means having them fall under the purview of the CFTC or the Securities and Exchange Commission. On Aug. 3, four U.S. lawmakers introduced the Digital Commodities Consumer Protection Act, a bill that proposed expanding the role of the CFTC by requiring crypto firms to adhere to many of the same standards for financial institutions dealing in commodities — registering with the regulator and making certain disclosures on trading practices and risks.

CFTC Reportedly Approving Over-the-Counter Crypto Derivatives Trading Products From SBI Group-Supported Platform

August 11, 2022 The Daily Hodl

SBI Group reports investee getting CFTC approval for OTC derivatives trading in US

August 10, 2022 Coin Telegraph

CFTC

Under the U.S. Commodity Exchange Act and CFTC regulations, derivatives exchanges must have approval to operate as a Designated Contract Market or a Swap Execution Facility.

The United States subsidiary of electronic trading platform developer Clear Markets has reportedly received approval from the Commodity Futures Trading Commission, or CFTC, to offer over-the-counter crypto derivatives products with physical settlement.

In a Tuesday notice, SBI Holdings — a stakeholder of Clear Markets — said the CFTC had approved the U.S. subsidiary operating a Swap Execution Facility, in which it plans to offer derivatives trading for U.S. dollar and Bitcoin (BTC) pairs. The Japan-based financial services company said its market maker planned to expand its trading partners in the United States following pilot transactions on Clear Markets.

SBI Holdings announced it had acquired a 12% stake in Clear Markets in August 2018, which it planned to increase in the future. At the time, the Japanese firm said the investment was aimed at creating a crypto derivatives trading platform catered toward institutional investors.

Under the Commodity Exchange Act and related CFTC regulations, derivatives exchanges — whether dealing with crypto or other assets — must have approval to operate as a Designated Contract Market or a Swap Execution Facility in the United States. According to the Fiscal Year 2023 budget request released in March, the CFTC was considering expanding its authority over financial products using crypto.

In May, a federal court ordered three co-founders of BitMEX to pay $30 million in civil monetary penalties for allegedly violating the CFTC’s conditions. Major investment bank Goldman Sachs has also reportedly been looking into breaking into crypto derivatives products through the U.S. subsidiary of cryptocurrency exchange FTX.

Cointelegraph reached out to the CFTC and Clear Markets, but did not receive a response at the time of publication.

CFTC and SEC propose amending reporting rules for large hedge funds on crypto exposure

August 10, 2022 Coin Telegraph

CFTC

The two U.S. financial regulators cited the growth in the hedge fund industry as the reason for the proposed change, due in part to digital asset investments becoming more common.

The United States Securities and Exchange Commission, or SEC, and the Commodity Futures Trading Commission, or CFTC, has proposed requiring large advisers to certain hedge funds to report any exposure to digital assets.

In a Wednesday notice, the SEC and CFTC proposed amending their confidential reporting form for certain investment advisers to private funds of at least $500 million. The Form PR would require qualifying hedge funds to not include exposure to cryptocurrencies when reporting “cash and cash equivalents,” but rather add them under a different category “to report digital asset strategies accurately.”

The two U.S. financial regulators cited the growth in the hedge fund industry as the reason for the proposed change, due in part to digital asset investments becoming more common since Form PR was introduced in 2008. According to the SEC and CFTC, having investment advisers provide more detailed information on strategies and exposure to certain assets would allow the Financial Stability Oversight Council to better assess potential risks to the U.S. economy.

“In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds,” said SEC chair Gary Gensler. “Since then, though, the private fund industry has grown in gross asset value by nearly 150 percent and evolved in terms of its business practices, complexity [...] If adopted, [this proposal] would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers.”

Our Commission will be meeting shortly to consider proposed changes to Form PF to amend reporting requirements for all filers and large hedge fund advisers.

Tune in to the livestream of our meeting at 10am ET: https://t.co/RhiOji1iyR
— U.S. Securities and Exchange Commission (@SECGov) August 10, 2022

A fact sheet on the proposal released on Wednesday showed the number of private funds has increased by roughly 55% between 2008 and the third quarter of 2021. According to data from market research firm IBISWorld, there were 3,841 U.S.-based hedge funds as of 2022.

PricewaterhouseCoopers reported in June that roughly one-third of the traditional hedge funds it surveyed globally were invested in crypto, but more than half had less than 1% exposure to digital assets out of their total assets under management. According to the firm, respondents cited “regulatory and tax uncertainty” as the greatest barrier to investing in crypto.

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