Bipartisan Legislation Would Give CFTC Oversight of "Digital Commodity Platforms" and "Digital Commodity" Trading | Practical Law

Bipartisan Legislation Would Give CFTC Oversight of "Digital Commodity Platforms" and "Digital Commodity" Trading | Practical Law

US Senators Debbie Stabenow (D-MI), John Boozman (R-AR), Cory Booker (D-NJ), and John Thune (R-SD) introduced the Digital Commodities Consumer Protection Act of 2022 (DCCPA), authorizing the CFTC to regulate "digital commodity platforms" and "digital commodity" trading. The proposal would effectively give the CFTC primary oversight over most crypto trading platforms in the US.

Bipartisan Legislation Would Give CFTC Oversight of "Digital Commodity Platforms" and "Digital Commodity" Trading

by Practical Law Finance
Published on 08 Aug 2022 • USA (National/Federal)
US Senators Debbie Stabenow (D-MI), John Boozman (R-AR), Cory Booker (D-NJ), and John Thune (R-SD) introduced the Digital Commodities Consumer Protection Act of 2022 (DCCPA), authorizing the CFTC to regulate "digital commodity platforms" and "digital commodity" trading. The proposal would effectively give the CFTC primary oversight over most crypto trading platforms in the US.
On August 3, 2022, US Senators Debbie Stabenow (D-MI), John Boozman (R-AR), Cory Booker (D-NJ), and John Thune (R-SD) introduced the Digital Commodities Consumer Protection Act of 2022 (DCCPA) authorizing the CFTC to regulate "digital commodity platforms" and "digital commodity" trading. The proposal would effectively give the CFTC primary oversight over most crypto trading platforms in the US..
Under the DCCPA, the CFTC would be charged with registration of digital commodity platforms, which are persons that are one or more of the following: a digital commodity broker, digital commodity custodian, digital commodity dealer, or digital commodity trading facility. The DCCPA would recognize that there are other financial agencies that have a role in regulating digital assets that are not commodities but function more like securities or forms of payment, and digital trading platforms would also be permitted to register with the SEC, as well. CFTC registration would preempt state law registration requirements relating to money transmission, virtual currency, and commodity brokers.
In addition to the authority to register digital commodity platforms, the DCCPA would give the CFTC exclusive jurisdiction over "digital commodity" trades, except transactions in which a merchant or consumer is using a digital commodity solely for the purchase or sale of a good or service. "Digital commodity" is defined as a fungible digital form of personal property that can be possessed and transferred person-to-person without necessary reliance on an intermediary. Under the DCCPA, digital commodities specifically include "property commonly known as cryptocurrency or virtual currency, such as Bitcoin and Ether" but exclude "an interest in physical commodity, a security, or a digital form of currency backed by the full faith and credit of the United States," effectively excluding security tokens and US CBDC from CFTC oversight.
The DCCPA would also give the CFTC:
  • Authorization to make rules governing margined, leveraged, or financed digital commodity trades.
  • The power to adopt customer protection rules, including requiring digital commodity platforms to:
    • disclose to customers material conflicts of interest and material risks of trading digital commodities;
    • communicate in a fair and balanced manner; and
    • establish standards for the platform's marketing and advertising.
  • Authorization to impose user fees on digital commodity platforms to fully fund its oversight of the digital commodity market.
The DCCPA would also include provisions separate from the CFTC-specific authorizations, such as:
  • Creating a process by which digital commodity trading facilities may list for trading digital commodity contracts and implement new rules or rule amendments. Under the DCCPA, digital commodity trading facilities would be permitted to self-certify a contract or rule, or seek prior CFTC approval, and the CFTC may disapprove or revoke a contract listing or rule if it is inconsistent with the DCCPA.
  • Setting out that digital commodity trades are not subject to the DCCPA's requirements for exchange trading applicable to retail, leveraged, non-spot commodity transactions.
  • Establishing extraterritorial (non-US) application of the DCCPA's provisions relating to digital commodities.
  • Establishing digital commodity platforms as financial institutions under the Bank Secrecy Act (BSA).
  • Extending the relevant provisions of the Bankruptcy Code to digital commodity trades, ensuring similar protections in insolvency as other commodity contracts.
The DCCPA would also require the CFTC to:
  • Provide education and outreach to customers participating in digital commodity markets, with these efforts funded through the fees assessed on digital commodity platforms.
  • Inspect and monitor digital commodity platforms.
  • Issue written rules and regulations to implement its powers under the DCCPA.
  • Issue interpretations regarding acceptable business practices under the DCCPA's enumerated digital commodity platform core principles.
  • Disclose information received from digital commodity platforms under certain conditions.
  • Examine racial, ethnic, and gender demographics of customers participating in digital commodity markets and complete a report regarding how these demographics will inform the CFTC's rulemaking, education, and outreach efforts in this area.
  • Complete a report studying the energy consumption and sources of energy used in connection with the creation and transfer of digital commodities and publication, with updates on a timely basis, of this information on its website.
The DCCPA sets out specific requirements for digital commodity platforms, including requiring:
  • All digital commodity platforms and their associated persons (APs) to register with the CFTC.
  • All digital commodity brokers, custodians, and dealers to be members of a registered futures association.
Under the DCCPA, all "digital commodity trading facilities" would need to comply with specific core principles, including:
  • Only permitting transactions in digital commodities that are not readily susceptible to manipulation or determined to be inconsistent with the DCCPA.
  • Providing a competitive, open, and efficient market for executing transactions.
  • Monitoring digital commodity trading and protect market participants from abuse.
  • Capturing and publishing trading information in a timely manner.
In addition to the above, each digital commodity trading facilities would be required to disclose certain information about the digital commodity contracts it lists for trading, including:
  • The operating structure and system of the digital commodity.
  • The trading volume and volatility of the digital commodity.
  • Certain information relating to digital commodities that purport to have a fixed value.
The DCCPA also proposes core principles for digital commodity brokers and dealers and would require them to:
  • Establish of fair and objective prices.
  • Keep records of all digital commodity transactions and provide this information to the CFTC upon request.
  • Conform with business conduct standards.
  • Establish risk-management systems.
  • Only permit trade, or arrange trades, in digital commodity contracts that are not readily susceptible to manipulation or determined to be inconsistent with the DCCPA.
  • Be subject to the same listing and disclosure requirements as applicable to digital commodity trading facilities for contracts on digital commodities.
The DCCPA also provided blanket core principles for all digital commodity platforms and would require each to:
  • Implement conflict of interest procedures.
  • Maintain adequate financial resources.
  • Establish system safeguards to minimize cybersecurity and other operational risks.
  • Comply with CFTC requirements for the treatment of customer assets.
  • Not engage in any act, practice, or course of business in connection with its business as a digital commodity platform that is fraudulent, deceptive, or manipulative.
If passed, the DCCPA would not apply to registered digital commodities platforms until the effective date of the ruling requiring digital commodity platforms to register. Under the DCCPA, crypto mining activity alone would not be sufficient to trigger registration as a digital commodity platform.
This is the third bipartisan and fourth piece of major federal crypto legislation introduced in 2022. The others are: