Author: Ethan Brady

The Chamber of Digital Commerce applauds Congressman Pete Sessions’ (R-TX) for introducing a Congressional Resolution highlighting the importance of Proof-of-Work (PoW) mining. This is the first-of-its-kind signal in support of the digital asset mining industry in the United States Congress.

The Resolution affirms that it is the sense of the U.S. Congress that PoW mining can help the U.S. achieve its energy goals. PoW mining involves using very powerful computers to attempt to solve complex computations that are necessary to create a new block in the Bitcoin blockchain. This process verifies the legitimacy of every transaction and is essential to the security of the cryptocurrency industry.

The Chamber’s Mining Initiative has fought vigorously for the opportunities that PoW mining can afford to achieve the U.S. economic, technology, and energy security goals. PoW mining is often misunderstood and attacked with misinformation around its energy consumption. However, PoW mining’s energy usage is transparent, verifiable, and represents only .14% of the global energy usage. That’s less than the total electricity output lost in transmission and distribution on the grid each year.

Today’s resolution is an important step towards recognizing the potential of PoW mining as a tool for developing U.S. energy opportunities and understanding the future of energy development requires collaboration and innovation across multiple sectors and industries, including the blockchain industry. We hope the entire Congress will rally behind Congressman Sessions’ Resolution and support PoW mining’s role in cementing the U.S.’ leadership in technology and energy development.

We commend Congressman Sessions for working with the Chamber’s members to formally support this industry on the House floor. We will continue to refute the misinformation around this industry through smart, common sense policies.

Chamber Submits Statement for the Record: House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion

March 9, 2023

Hearing entitled, “Coincidence or Coordinated: The Administration’s Attack on the Digital Asset Ecosystem.”

The Chamber of Digital Commerce submitted this letter for the record in connection to the March 9, 2023 hearing in the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion entitled, “Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem.” 

The letter urges Congress to preserve American preeminence in digital asset and blockchain technology innovation by proposing a legal framework that will allow the United States to lead the exploration of these nascent technologies. The Chamber hopes to be a valuable resource to the Subcommittee and appreciates the opportunity to collaborate on bipartisan, common-sense policy solutions. 

“Digital asset markets are global and here to stay. It’s essential that regulators hear directly from market participants who can provide key market information and technology insights. The CFTC advisory committees will provide a diverse body of expertise to the agency as it goes about this process, and I am delighted to represent the Chamber of Digital Commerce in the important GMAC advisory committee work being led by Commissioner Pham.” – Perianne Boring, Founder & CEO, Chamber of Digital Commerce.

View CFTC Press Release

For almost a decade, the Chamber of Digital Commerce has advocated and encouraged U.S. policymakers to fulfill their duty and set a clear legal and regulatory framework for the digital asset industry and investors.  

The demise of FTX and a string of market failures of centralized entities underscores the need for a U.S. legal environment that brings digital assets and blockchain technology further into the regulatory perimeter. While some policymakers are rightly skeptical in light of recent history, calls for more aggressive regulation are misplaced when a lack of clear rules of the road in the first place contributed to these market failures. 

Digital assets and blockchain technologies continue to serve as crucial innovations to the global economy, and U.S. leadership in shaping the policies for our industry is vital. The Chamber’s 2023 policy goals will immediately move the industry forward and provide the regulatory certainty it has advocated since 2014. 

1. Get the language right for digital assets and create a taxonomy 

In the absence of regulatory action, Congress should immediately consider legislative proposals like the Securities Clarity Act (H.R. 4451) or Eliminate Barriers to Innovation Act (H.R. 1602). These proposals help clarify the characterization of assets and will provide the regulatory certainty to operate more effectively and safely in the U.S., and mitigate efforts to flee jurisdictions with more regulatory certainty.

2. Correct the ineffective and confusing patchwork of policies 

Digital asset exchanges are currently regulated at the state and federal levels as money service businesses, subjecting them to a host of divergent laws and regulations. This patchwork system for a diverse and fast-evolving industry is an ill-tailored and unsuitable substitute for a comprehensive regulatory approach. 

3. Provide regulatory clarity before enforcement actions 

The current “regulation by enforcement” regime in the U.S. and the lack of regulatory clarity has pushed digital asset activity overseas, outside the U.S. government’s purview, and given rise to offshore exchanges, like FTX. It is unlikely regulation would have prevented the FTX fraud but could have minimized the impact on U.S. investors. The Chamber’s National Action Plan for Blockchain provides regulators and Congress with the regulatory blueprint for a sustainable path forward.

4. Move ahead with spot bitcoin Exchange-Traded Funds (ETFs) to protect investors

As U.S. trading activity has sought opportunities in other jurisdictions, U.S. retail investors are being denied access to a well-understood and cost-efficient investment product: a spot bitcoin ETF. U.S. investors will continue to trade bitcoin and should be offered SEC-registered products by financial advisers, broker-dealers and stock exchanges with whom a retail investor interacts for their traditional investments.

For more information, read the Chamber’s report: “The Crypto Conundrum: Why Won’t the SEC Approve a Spot Bitcoin ETF?”

5. Require adoption of proof of reserves methods

Recent events illustrate the uneven and inconsistent audit methods for proving the existence of reserves to meet customer liabilities. Proof of reserve processes enable customers and regulators to verify that their money is safe and secure and that the institution is holding the amount of capital it claims. Digital asset exchanges should be required to adopt on-chain proof of reserves to demonstrate in real-time (24/7) that the platform possesses adequate reserves of assets for customers’ and regulators’ eyes. The method shall be performed by cryptography and/or a third-party consultant, or an independent certified public accountant. Regulators should also leverage blockchain technology in their work to examine digital asset entities to increase efficiency and accuracy. 

For more information, read the Chamber’s Proof of Reserve’s Practitioner’s Guide.

6. Embrace self-custody

The freedom of self-custody through a self-hosted wallet plays an important role, allowing users to preserve financial privacy and to securely store their assets without threat of loss from the security breakdown of a third-party custodian. Still, there is a high degree of risk when one self-custodies. Self custody only works if users are properly educated on the associated risks and are free to choose between self-custody and employing other custodial services. Policymakers and industry should partner to create an education campaign on self custody to make sure risks are thoroughly understood.  

Policymakers should also ensure that the option to self custody is not infringed and consider proposals like the Keep Your Coins Act (H.R. 6727), which would prohibit any federal agency from promulgating a rule that would impair a person’s ability to act as a self-custodian.

7. Provide custody clarity

The SEC, OCC, and state regulators each have differing custodial requirements for digital assets. Progress on guidance and clarity has been curtailed by a revolving door of leaders and jurisdictional battles. Providing continued clarity on how existing custody rules apply to digital assets, and allowing the traditional, regulated financial system to interact with digital assets, will provide a safer arena for users to navigate the digital asset ecosystem. 

Customers should have the choice to hold digital assets with exchanges, regulated banks or broker-dealers. Yet, traditional U.S. custodians are reluctant to offer digital asset services due to unclear regulatory approval requirements. Additionally, the SEC under staff accounting bulletin (SAB) 121 has made it financially unworkable to hold digital assets. SAB 121 requires custodians to hold an equal asset on the balance sheet as a liability, meaning for every $100 in bitcoin the custodian holds, it must also hold $100 in a similar asset on the balance sheet to limit risk – an unprecedented requirement. Congress should require the SEC to rescind SAB 121 in favor of a notice and comment rulemaking and regulators should provide clear custody guidance for incumbent and entrant providers.

8. Require segregation of customer and entity assets 

Unlike brokerage accounts, digital asset exchanges are not currently required to segregate customer assets from the firm’s proprietary business accounts. Commingling of assets should not be an accepted practice and digital asset platforms should proactively take the step to segregate accounts to ensure user funds are always protected. Digital asset exchanges should work with U.S. regulators to ensure these efforts are done safely and soundly and eventually legally enforced. 

9. Encourage insurance coverage 

There should be greater regulatory clarity so digital asset insurers feel more secure extending coverage and offering competitive price points to keep consumer funds safe. Most digital asset platforms lack insurance protection of consumer funds in the event of theft or fraud. Lack of regulatory clarity has muddied insurance risk assessments leading to small coverage offerings. Congress should examine how to best encourage insurance coverage options for digital asset platforms without requiring funding from such federal taxpayers asFederal Deposit Insurance Corporation (FDIC) insurance. 

10. Study the benefits and use cases of decentralized finance (DeFi)

FTX was one of several centralized digital asset platforms that held customer funds and collapsed this year. Failure resulted from individual decisions unrelated to blockchain technology. Decentralized exchanges and lending platforms have both performed safely and securely this year despite market turmoil. DeFi protocols offer immense benefits to the U.S. financial system related to accessibility, autonomy, security, and transparency. Policymakers should study the risks and benefits of DeFi before proceeding with any legislative or regulatory action that may affect its availability and accessibility in the U.S.  

On Monday (Nov 28) we submitted a response to the Department of Energy Request for Information to improve energy generation in rural or remote communities across the country believe that digital asset mining provides an unprecedented opportunity to facilitate the transition to more sustainable energy futures for the often-overlooked regions of the U.S. It would be prudent of the Biden Administration to include digital asset mining considerations in all energy development policy discussions moving forward.  We will continue to work with DOE and others to make sure the U.S. remains a leader in digital asset mining and energy development. 

On behalf of the Chamber of Digital Commerce and its membership, which includes many digital asset mining companies, we are severely disappointed in Governor Hochul’s decision to approve a moratorium on digital asset mining operations that use proof-of-work (PoW) authentication methods to validate blockchain transactions (A.7389-C (Kelles)/S. 6486-D (Parker)). To date, no other industry in the state has been sidelined like this for its energy usage. This is a dangerous precedent to set in determining who may or may not use power.

The PoW mining industry has been spurring economic growth, job creation, and inclusion for historically underrepresented populations in New York, while also creating financial incentives for the buildout of renewable energy infrastructure. With this legislation becoming law, we expect the mining companies, or those considering business in the state, to leave and head to more friendly regulatory jurisdictions in the U.S. – a trend far too many industries in New York State are realizing daily.

Additionally, the state’s argument that the mining industry’s energy use is exponentially beyond other industries is blatantly false. The Climate Leadership and Community Protection Act requires statewide greenhouse gas emissions be reduced 85% by 2050 and achieve net zero emissions in all sectors of the economy by that time. PoW mining is a catalyst to achieve this goal. The Bitcoin Mining Council has estimated that the global mining industry’s sustainable electricity mix is 58.5% and growing. 

Moreover, on the rare occasions when customer energy demand spikes, PoW miners can work cooperatively with utilities to cut off their power demands for the benefit of the grid in mere minutes with no adverse effects, unlike data centers, cloud service providers, and manufacturing facilities. This conversation has fallen on deaf ears with New York State lawmakers and unfortunately, industry growth will be hindered by implementing this arbitrary moratorium.

We welcome the opportunity to work together in the future to develop common sense legislation that will work to benefit the state, the digital asset industry, and of course, the environment. Unfortunately, this effort does not meet the mark.

The Chamber of Digital Commerce submitted a response to the U.S. Department of the Treasury’s Request For Comment (RFC) on illicit finance and national security risks of digital assets pursuant to Executive Order 14067 – “Ensuring Responsible Development of Digital Assets,” and the U.S. Treasury’s Illicit Finance Action Plan.

• The Chamber’s response focuses primarily on opportunities to efficiently address digital-asset-related security risks, specifically in non-fungible tokens (NFTs) and decentralized finance (DeFi), and emphasizes the need for increased public-private collaboration and information sharing.
  
• This request follows Treasury’s July 2022 RFC on risks and opportunities facing digital assets, which the Chamber also provided feedback, and is part of a broader policy initiative by the Biden Administration to set forth a regulatory framework on digital assets.
  
• Read the entire response here.

The Chamber’s comments emphasize several themes that bear repeating and are consistent with previous responses to the government. They include:

1. Risk vs. Opportunity – The discussion of risks in digital assets should not be considered in a silo but in comparison to legacy systems that struggle with the same risks.
   
2. Principles vs. Rules – Legacy systems and digital asset systems need to adhere to similar principles with respect to illicit finance and anti-money laundering rules, but not through identical rules.
   
3. Information Sharing – In addressing illicit finance risks, there needs to be me more sharing between the public and private sectors.
   
4. Regulator Cooperation rather than Competition – We support efforts to root out illicit actors by regulators but it appears multiple regulators are competing for primary roles.

Digital asset companies, acting in good faith, don’t have clear regulatory expectations. The rules to the road need to be better defined and the threat of enforcement without clear rules is problematic.

The Chambers response addresses illicit financial risks from a wide range of topics such as technological innovations to non-fungible tokens (NFTs) to decentralized finance and peer-to-peer payment technologies. It also touches upon aspects of anti-money laundering and countering the financing of terrorism controls.

What’s next: It doesn’t appear the Congress, having introduced over 74 digital asset-related pieces of legislation this session, will pass any legislation this year. So, any regulatory developments or guidance in the near-term – if any – is likely to come from the executive branch.

A thank you to Jamal El Hindi, MJ Shin, and Weisiyu Jiang from Clifford Chance LLP for leading our response to the Treasury Request on Illicit Finance, National Security Risks of Digital Assets

The definition of a commodity is imperfect and ambiguous – there is no bright line test. Generally, commodities are basic goods that can be bought and sold at prices that are heavily influenced by supply and demand. In commerce, commodities are interchangeable with other goods of the same type. For example, a piece of corn is interchangeable with another piece of corn in the market with no regard to who produced the corn.

Commodities can be anything. They are generally natural resources, but recent innovation has expanded the classification of commodities to include new developments that represent the same characteristics, such as computer memory and more recently, bitcoin. 

Pursuant to the U.S. Commodity Exchange Act (CEA), a commodity is defined broadly by a list of enumerated products. For example, a commodity is defined as being wheat, cotton, rice, or corn but not onions or motion picture box office receipts – it can get confusing. The CEA does not include bitcoin or other virtual currencies in its enumerated definition of commodity. So, why is bitcoin classified as a commodity?

In 2015, the U.S. Commodities Trading Future Commission (CFTC) defined bitcoin and other virtual currencies as commodities under the U.S. Commodity Exchange Act. The CFTC’s definitional decision came to light in a settlement order, which stated, “[T]he definition of a “commodity” is broad […] Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.” 

As stated, determining if something is a commodity does not require an elemental test or clear-cut definition as used by the Securities and Exchange Commission (SEC) for securities determination (i.e., the Howey Test). Moreover, securities are commodities but not all commodities are securities. In a separate enforcement action, a U.S. federal court found that the CEA’s text supports the CFTC’s position that virtual currencies are commodities, as the CEA defines “commodity” generally and categorically, “not by type, grade, quality, brand, producer, manufacturer, or form.” 

Therefore, the CFTC defined bitcoin as a commodity because it looks and acts like a commodity. It’s an illustrative example of functional regulation. Never mind the colloquial reference to “digital gold” (gold being a commodity), bitcoin and other cryptocurrencies behave like commodities. Bitcoin is interchangeable, meaning each coin is identical. Bitcoin’s price is also driven by supply and demand and is not dependent or influenced by a producer or “centralized entity.” Bitcoin is categorically a commodity. 

Whether other virtual currencies are to be considered commodities is to be determined. To date, the CFTC has made a declarative judgment that bitcoin and ether are commodities and Congress is working to solidify that declaration through statute (see the S. 4760, Digital Commodities Consumer Protection Act). 

Likely, many other virtual currencies should be classified as commodities, while others will inevitably meet the SEC’s test and be deemed securities. It will be up to the regulators to provide that judgment and clarity. Stay tuned!

On September 9, the White House Office of Science and Technology policy (OSTP) released a Report titled “Climate and Energy Implications of Crypto-Assets in the United States.” Climate is one of the key pillars of the Biden administration and the Chamber of Digital Commerce shares the administration’s goals of promoting clean, renewable energies. It is why we advocate so hard for digital asset mining and the Proof-of-Work consensus mechanism, as can be seen in our response to OSTP’s Request For Information on this subject from May.  

After reading the Report, it was clear what federal agencies will play a crucial role in the maturation of this industry. The Report’s recommendations are directed at the Environmental Protection Agency (EPA), Department of Energy (DOE), and Federal Energy Regulatory Commission (FERC). Let’s take a look at those recommendations:

1. Recommendation: The Environmental Protection Agency (EPA), the Department of Energy (DOE), and other federal agencies should provide technical assistance and initiate a collaborative process with states, communities, the crypto-asset industry, and others to develop effective, evidence-based environmental performance standards for the responsible design, development, and use of environmentally responsible crypto-asset technologies.
   
2. For improved analytical capabilities that can enhance the accuracy of electricity usage estimates and sustainability, the National Science Foundation, DOE, EPA and other relevant agencies could promote and support research and development priorities that improve the environmental sustainability of digital assets, including crypto-asset impact modeling, assessment of environmental justice impacts, and understanding beneficial uses for grid management and environmental mitigation. 
   
3. DOE, in coordination with FERC, the North American Electric Reliability Corporation and its regional entities, should conduct reliability assessments of current and projected crypto-asset mining operations on electricity system reliability and adequacy.
   
4. For improved analytical capabilities that can enhance the accuracy of electricity usage estimates and sustainability, the National Science Foundation, DOE, EPA and other relevant agencies could promote and support research and development priorities that improve the environmental sustainability of digital assets, including crypto-asset impact modeling, assessment of environmental justice impacts, and understanding beneficial uses for grid management and environmental mitigation. 
   

In 2022, the Chamber of Digital Commerce has engaged each one of these agencies and is committed to working even closer with them as they dissect these policy recommendations from the White House. We look forward to continued dialogue and collaborating as the rules and regulations are developed for the digital asset mining industry. 

As these issues move forward, we look forward to having continued dialogue with these agencies and collaborating as the rules and regulations are developed for digital asset mining industry.