Senators are pitching bipartisan legislation that regulates Ether and Bitcoin as digital commodities. The two coins are among the biggest cryptocurrencies and take up 60% of the market. The Digital Commodities Protection Act of 2022 defines Bitcoin and Ether as digital commodities.
The legislation will give the CFTC (Commodities Future Trading Commission) the right to regulate digital commodities like Bitcoin and Ether. It also gives CFTC jurisdiction over cryptocurrencies and regulates trading practices. Here are some of the highlights of the bill.
Defining a Digital Commodity
The bill seeks to give the CFTC the power to define digital commodities. The legislation does not offer any definition for what constitutes a digital commodity.
However, the bill excludes securities as part of the digital commodities. It also does not include physical goods or cryptocurrencies backed by the government.
The SEC currently classifies nine cryptocurrencies as digital commodities. That has generated confusion about what constitutes a digital currency and how it will be regulated.
What about NFT?
It is also not clear if the bill defines NFTs as digital commodities. The SEC had previously stated that NFTs will be reviewed on a case-by-case basis. Two action lawsuits were recently filed against Coinbase for allegations of insider trading.
The lawsuits claim Coinbase had allowed users to trade in digital assets that should have been registered as securities. Another suit was filed by a company demanding compensation from Coinbase for failing to adhere to SEC’s regulations.
Nevertheless, the bill clarifies that Bitcoin and Ether are digital commodities and cannot be securities. Cryptocurrencies can only be securities if used to raise capital for an organization. An initial coin offering meant to fund a company is an example of a case where the cryptocurrency will be listed as a security. Securities are the responsibility of the SEC.
CFTC Jurisdiction and Registration Requirements
Statistics show that most people without a credit card are likely to trade with cryptocurrencies. According to the senators backing the DCCPA act, Ether and Bitcoin constitute 60% of the market. As the adoption of digital commodities continues to grow, the market is often fraught with risks.
Some of the risks of trading in digital currencies include:
- Digital commodities are often the target of hackers and fraudsters
- They don’t offer a clear path for recourse if stolen
- E-wallets are prone to cybersecurity risks
- Are highly speculative and can be manipulated
Section 3 of The Digital Commodities Protection Act will give the CFTC exclusive jurisdiction over digital commodities trading. Any entity playing the role of a digital platform must register with the CFTC.
The bill has created new categories for the digital commodities platform. They may include digital commodity brokers, dealers, custodians and trading facilities.
While the legislation gives CFTC exclusive jurisdiction over digital commodities, it acknowledges that other regulatory bodies will have jurisdiction over digital assets.
Regulating Trading Practices and Ensuring Compliance
The act also stipulates the core principles that digital commodity platforms must follow to ensure compliance. Trading facilities must ensure transactions in digital commodities are not susceptible to manipulation. They must protect users from abuse and capture information accurately and on time.
For example, a Bitcoin Casino must implement cybersecurity measures and protect users from abusive trading practices. The platform is also required to report all suspicious transactions to the CFTC.
The legislation has provisions that address whether miners should be treated as traders. It had been a contested issue in a debate over a discussion on the infrastructure bill.
By protecting the status of miners, legislators believe the bill will protect innovation. Otherwise, the United States will lose as miners shift their operations to other countries.
Another crucial compliance requirement for digital commodities platforms is customer protection to trading practices. The platform must disclose potential cases of conflict of interest and communicate to clients in a fair manner.
Traders and custodians of digital commodities traders like Bitcoin Casinos must also join trade associations to ensure self-regulation. Commodity platforms will also fund oversight and educational outreach that the CFTC will oversee. But an organization that is registered with the CFTC can also be listed by the SEC.
Overview of the DCCPA Act
The DCCPA Act of 2022 aims to create a regulatory environment to manage risks and protect consumers. The current regulatory environment does not clarify over the entity responsible for commodity trading.
The Act will enable the CFTC commission to define digital commodities and provide oversight to ensure compliance. The bill focuses on Ether and Bitcoin because “they are the ones most likely to survive”. A more stable trading environment could foster innovation and reduce cybersecurity risks and fraudulent practices.
Even though it is a long way from becoming law, many stakeholders in the industry have welcomed the bill. According to Senator Thune, the bill will “provide the CFTC with the necessary visibility into the marketplace”. The CFTC will be in a better position “to respond to emerging risks and protect consumers”.