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.
- 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.