This week, a group of congressmen put forth a new cryptocurrency bill labeled the Cryptocurrency Act 2020. The goal of the new legislation is to provide additional clarification on digital asset regulations. The bill has some wide-sweeping regulations that, if voted into law, could reshape the entire crypto sphere moving forward.
The Cryptocurrency Act 2020 was introduced by U.S. Representative Paul Gosar (R-AZ). The senator stated that it was his desire to attribute regulatory clarity to the market. Currently, much of the crypto space is vague in terms of regulations. Consumers and lawmakers are in a debate over what agencies are responsible for regulations of what types of cryptocurrencies.
The Types of Digital Assets – Cryptocurrency Act 2020
The new legislation begins with a categorization of cryptocurrencies into three main groups. These groups are then used to determine what agency is responsible for the creation of regulations and enforcement.
The first class described in the new bill are cryptocurrencies. Cryptos include Bitcoin, Litecoin, and any other cryptocurrencies that don't fall under the current securities regulations. The bill classifies these tokens as any crypto that “includes representations of United States currency or synthetic derivatives resting on a blockchain or decentralized cryptographic ledger.”
The bill also states that any “synthetic derivatives determined by decentralized oracles or smart contracts” fall into this category. Interestingly, this categorization places reserve-backed digital assets such as stablecoins directly into the cryptocurrency category.
The next class of cryptocurrency described in the bill are crypto-commodities. These tokens are “economic goods or services that markets treat with no regard for who produced the goods or services.” A key aspect of these tokens is the fact that they contain some form of substantial fungibility. Fungible assets are interchangeable such as the US dollar. Basically, any two dollars are equal in value. Finally, these assets must reside on a blockchain or decentralized cryptographic ledger to fall into this classification.
The final type of coin described in the bill is crypto-securities. These tokens are any coin that fails the Howey Test. This class of crypto can include tokenized debt, equity, and derivative instruments that live on a blockchain or decentralized ledger. Security tokens are among the newest type of cryptocurrency. Thee tokens seek to bring integrated compliance into the market.
Interestingly, the bill differentiates between security tokens that include a “synthetic derivative both operated and registered with the Department of the Treasury as a money services business in compliance with the Bank Secrecy Act.” Additionally, these coins must adhere to the strict anti-money laundering, anti-terrorism, and screening requirements of the Office of Foreign Assets Control, as well as, the Financial Crimes Enforcement Network.
Federal Digital Asset Regulators – Cryptocurrency Act of 2020
Aside from an attempt to clarify the market, the Cryptocurrency Act 2020 lays out what government agencies are responsible for each class of token. If passed, these agencies will gain regulatory control over the assets in their jurisdiction. Additionally, these agencies will be responsible for informing the public on the appropriate licenses, certifications, or registrations necessary to participate in these markets.
The three regulatory bodies mentioned in the bill include the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Financial Crimes Enforcement Network (FinCEN). These groups would gain the sole authority over their respective digital asset types.
The new strategy would place those tokens deemed as cryptocurrencies under the regulations of the Financial Crimes Enforcement Network (FinCEN). For its part, FinCEN must maintain a public record of all licenses, certifications, and registrations required to create, issue, or trade digital assets.
Additionally, FinCEN would need to collaborate with the Secretary of the Treasury to enforce AML and KYC protocols in the market. Primarily, regulators want to develop a way to trace all cryptocurrency transactions. This final task could prove to be a real choir as many cryptocurrencies have privacy enabling features which would make this task almost impossible.
The bill keeps security tokens under the watchful eye of the Securities and Exchange Commission (SEC). The SEC recently began cracking down on what they considered illegal securities offerings from the 2017 ICO craze. As of late, the SEC prosecuted multiple firms such as Paragon and most recently, the startup Blockchain of Things Inc. (BCOT). Currently, the SEC assumes jurisdiction over any tokens that fail the Howey Test.
The Commodity Futures Trading Commission would gain jurisdiction of the crypto-commodities class. The group will need to develop the framework for these tokens from the ground up if the legislation passes. Analysts believe crypto-commodities are to see substantial growth over the next few years.
The Motivation for the Legislation
Many in the cryptocommunity point to the new legislation as a means to combat Facebook’s developing digital asset, Libra. Ever since Facebook announced its goals to produce a stablecoin that will operate on its network, lawmakers have been in a rush to configure some form of framework to contain the company's potentially game-changing product.
In the past, multiple senators called for Libra to see categorization under securities. Earlier in the year, a group of bipartisan U.S. Senators proposed a bill that would place all stablecoins into the securities category. The bill – the Token Taxonomy Act of 2019 would firmly place Facebook's latest crypto under the regulatory supervision of the SEC.
Cryptocurrency Act of 2020
This latest development showcases just how far cryptocurrencies have come in the last decade. Now, lawmakers are scrambling to develop some way to maintain control over these decentralized currencies. In the end, you may find that the technology operates in a manner that makes enforcement of these regulations nearly impossible. For now, the cryptocommunity watches and waits as lawmakers scramble for options.