CFTC Jurisdiction and Definition of a Digital Commodity
The centerpiece of the Stabenow-Boozman bill is its command that the CFTC “shall have exclusive jurisdiction over any account, agreement, contract, or transaction involving a trade in digital commodities.” While the attribution of jurisdiction is clear, the link to “digital products” is an Achilles’ heel of ambiguity and an invitation to harm. The Stabenow-Boozman bill defines a digital commodity as “a fungible digital form of personal property that can be owned and transferred from person to person without necessarily using an intermediary”, which seems to exclude NFTs. This expressly includes “assets commonly referred to as cryptocurrency or virtual currency, such as Bitcoin and Ether”. But it is also expressly excludes things such as an interest in a physical commodity and, significantly, securities. And therein lies the problem. The SEC has always taken the position that most digital assets, with the exception of Bitcoin and Ether, are securities. The SEC Complaint Alleging Insider Trading at Coinbase— SEC c. Wahi et al., Case No. 2:22-cv-01009 (WD Was.)—is the most recent example of this view. In it, the SEC alleges that nine different digital assets that can be traded on the Coinbase platform are, in fact, securities that must be registered under securities laws.
Excluding securities from the CFTC’s jurisdiction over digital goods would not necessarily be problematic if the bill attempted to distinguish digital assets that are securities from those that are not. By not doing so, however, the Stabenow-Boozman bill relies on the courts and the SEC to set the limits for which tokens can be considered commodities. History teaches that such a process is unlikely to be smooth or painless. Given the SEC’s recent stance on the matter, in practice the Stabenow-Boozman bill would likely grant the CFTC clear jurisdiction over Bitcoin and Ether transactions, and little else. That doesn’t seem to be the intention, given the Stabenow-Boozman bill’s general reference to “cryptocurrency and virtual currency,” but it’s a predictable outcome under current circumstances.
Whether a digital asset is a security or a commodity is the pivot upon which fundamental questions of regulatory authority rest. Although, based on a combination of CFTC settlement orders, Federal Court rulings, and statements from CFTC and SEC chairmen, the industry has become comfortable recognizing Bitcoin (and, to a lesser extent, Ether) as a commodity, the issue of commodity versus security is unresolved for many other digital assets. Therefore, in order to bring clarity and certainty to these markets, it is imperative that future legislation in this area addresses this issue, clearly defining digital assets as goods or securities (or part of each) or providing a way to easily determine how a digital asset will be classified and, by extension, regulated.
Digital Product Market Players and Other Key Provisions
Another important feature of the Stabenow-Boozman bill is its creation of various digital product market players. These include digital commodity brokers, custodians, traders, and trading facilities (as well as “associated persons” of brokers and traders, who are also required to register with the CFTC). The Stabenow-Boozman bill awkwardly defines a “digital product platform” to include all of the aforementioned entities, notwithstanding the disparate services they provide and that a “platform” is generally considered an exchange or similar . And the definitions attributed to these platforms generally correspond to the roles that these entities play in traditional financial markets. Note, however, that the definition of digital product depository excludes federally insured depository institutions and credit unions. Accordingly, to the extent that these entities provided custodial services for digital goods, they would not need to register with the CFTC, but would still be permitted to provide such services under guidance provided by the Office of the Comptroller. currency. Further, the definitions of digital commodity brokers, traders, and trading facilities do not include “a person solely because that person validates transactions in digital commodities”, i.e. miners.
The Stabenow-Boozman bill also states that the CFTC may prescribe rules and regulations permitting an entity to register as more than one digital product platform, including registered entities such as online brokers. swaps and futures commission agents; and that a digital commodities platform registered with the CFTC may also be registered with the SEC as an exchange, broker, trader or other trading platform. As a result, a single entity could potentially play multiple roles within the digital asset, physical commodity, and securities markets.
The Stabenow-Boozman bill goes on to outline “fundamentals” for digital commodity platforms in general, and for trading facilities, brokers and traders in particular. These are similar in many ways to the “fundamentals” proposed for digital asset exchanges in the Lummis-Gillibrand Bill. An important similarity is the provision regarding “Treatment of Customer Assets” applicable to all digital product platforms. As in the Lummis-Gillibrand bill, the Stabenow-Boozman bill proposes a disintermediated framework for transactions in digital goods that does not include a provision requiring platforms to hold customer goods with a merchant at futures commission.
The Stabenow-Boozman bill also builds on the Lummis-Gillibrand bill by limiting brokers, dealers and trading facilities to only conduct “transactions” or “digital goods” that are not “easily susceptible to manipulation. Unlike the Lummis-Gillibrand bill, however, the Stabenow-Boozman bill does not attempt to define what “easily susceptible to manipulation” means, or the factors to consider when making such a determination, although that the CFTC can presumably look at the factors that it takes into account when reviewing contracts in the futures markets.
This last point reflects a larger theme seen throughout the Stabenow-Boozman bill. Rather than addressing each issue through legislative language, the Stabenow-Boozman bill systematically contemplates future rulemaking to be conducted by the CFTC on specific issues. For example, the Stabenow-Boozman bill states that the CFTC may make rules or regulations regarding important matters such as margined or leveraged trading of digital products, lending of digital products, consumer protection (including marketing and advertising standards) and mixing of customer goods. . Since the Commission can determine whether a digital asset listed for trading on a digital commodity trading system is, in fact, not easily susceptible to manipulation, it would appear that the bill would also rely on the expertise of the CFTC to solve this problem.
Other important provisions of the Stabenow-Boozman Bill include the following:
- Bankruptcy: The Stabenow-Boozman bill would provide much-needed clarity on how the assets of customers of a digital product platform would be treated in the event of bankruptcy, by extending relevant provisions of the bankruptcy code to transactions in digital products , thus guaranteeing protections similar to those provided for traditional commodity contracts.
- Fight against money laundering: The Stabenow-Boozman bill would establish digital commodity platforms as “financial institutions” under the Bank Secrecy Act, requiring such platforms to submit reports of suspicious transactions and meet other compliance obligations. AML compliance.
- Extra-territorial effect: The Stabenow-Boozman bill would be global in scope, in that its digital goods provisions would extend to all activities that (i) have a reasonably foreseeable significant effect in the United States; (ii) involve the offer, execution or confirmation of a digital goods transaction with anyone from the United States or the conduct of an office or business anywhere in the United States (including any territory or possession of the United States). In contrast, the current provision relating to the CEA’s cross-border jurisdiction over swaps (i.e. Section 2(i)) only applies the CEA extraterritorially to activities that “have a direct and important relating to activities or having an effect on the commerce of the United States. »
- Preemption of State Law: Stabenow-Boozman bill would supersede state law registration requirements for money transmission, virtual currency and commodity brokers, as well as law compliance requirements of the State relating to the transmission of money, virtual currency and the brokerage of raw materials.
- Energy consumption: The Stabenow-Boozman bill would address concerns about the amount of energy expended by — and the carbon footprint associated with — the digital asset space by requiring the CFTC to prepare a report on energy consumption and sources energy associated with creation and transfer. of the most traded digital products. The report would be posted on the CFTC’s website and periodically updated.
Notably, the Stabenow-Boozman bill does not attempt to address topics such as the tax treatment of digital assets, the issuance of stablecoins, or reporting to the SEC.
Conclusion
In summary, although the Stabenow-Boozman Bill is significantly narrower in scope than the Lummis-Gillibrand Bill, it nevertheless provides a comprehensive regulatory framework to oversee transactions in digital goods and oversee multiple market participants in this space. And while it takes an approach to the digital commodity market that would promote efficiency and reduce transaction time and costs, it does not attempt to define the digital assets that would be traded in that market. In its current form, for all intents and purposes, the Stabenow-Boozman bill seems to apply most clearly to Bitcoin and Ether, leaving significant issues regarding other cryptocurrencies and virtual currencies unclear. As a result, amendments to the Stabenow-Boozman bill or additional legislation would be needed to bring more certainty to this space.
