It's a good bill, but it needs some work.
2/ What is the DCCPA? The heart of the bill is a grant of exclusive jurisdiction over crypto spot markets to the CFTC.
This reflects a bipartisan, bicameral consensus that the CFTC is the right regulator for crypto.
3/ The DCCPA gives the CFTC authority to regulate trades in a new asset type, a “digital commodity.”
It also gives the CFTC authority to regulate a new entity category, a “digital commodity platform,” including:
- brokers - dealers - custodians - trading facilities (exchanges)
For more details on the DCCPA & to read the full text:
5/ But, like all early drafts of significant legislation, the DCCPA has some issues that Senate Ag members should address before voting the bill out of committee, or else it might end up doing more harm than good.
Here are the top five issues we see in the current draft:
6/ First, the bill’s “digital commodity” definition is too narrow & vague.
The biggest unresolved question plaguing crypto now is whether a given asset is a security or commodity.
Any legislation on crypto spot regulation must draw a clear dividing line between the CFTC & SEC.
7/ The DCCPA’s digital commodity definition fails to resolve that harmful uncertainty.
The bill has a blanket carveout for "securities," so the SEC can still claim authority over any asset that it wants to accuse of being a security, which under this SEC is basically everything.
8/ The bill also gives two examples of digital commodities: BTC & ETH. Yes, we all agree those two are commodities (not securities), but including only those two implies a much narrower jurisdictional scope for the CFTC than it should have & makes an agency turf war more likely.
9/ Second, the bill could be interpreted as a ban on DeFi.
The “digital commodity platform” definitions are all designed for centralized custodial markets.
Yet, as @SenGillibrand sharply pointed out, they also might capture DeFi protocols—no more than code—which can't comply.
10/ For example, one entity type is a “digital commodity trading facility.”
The definition goes way beyond custodial exchanges: a “group of persons that constitutes, maintains, or provides a...system in which multiple participants have the ability to execute...transactions....”
11/ There’s a bit more nuance here, but not much.
As @sheila_warren testified, the bill is "unworkable" for DeFi: it says trading facilities “shall provide a centralized market for executing transactions.”
What does that mean for DeFi protocols? Wallets? Apps? Users? Unclear.
12/ Similarly, another entity type is a “digital commodity dealer.”
That definition is also extremely broad: "a person that makes a market in a digital commodity."
Does that mean every liquidity provider in an AMM DEX protocol has to register with the CFTC? That just can't be.
13/ To be clear, I'm confident that banning DeFi isn't the goal here.
But it could be an unintended result of applying the same rules to both centralized intermediaries & decentralized protocols.
Regulation should be tailored to risk, but the bill isn't tailored to DeFi at all.
14/ Third, other “digital commodity platform” definitions are too broad.
The bill imposes onerous requirements on some firms that aren’t justified by the minimal degree of risk they pose.
For example, brokers & dealers that only work with large institutional counterparties…
15/ …or custodians that are already licensed & overseen by other prudential regulators.
As I said above, regulation should be tailored to risk. For these brokers, dealers, & custodians, the DCCPA overshoots the mark, requiring registration where it isn't necessary or helpful.
16/ Fourth, the bill gives the CFTC wide extraterritorial jurisdiction, allowing it to regulate transactions that take place entirely outside the United States.
That’s a mistake. US regulators should focus on US activities & prioritize international cooperation for all the rest.
17/ Dodd-Frank gave the CFTC similarly wide extraterritorial jurisdiction for swaps markets & it didn't go well, leading to years of contested rulemaking & litigation.
This could be even worse for crypto, given the inherently global nature of the technology & thus the markets.
18/ Fifth, the bill threatens financial privacy by forcing all "digital commodity platforms" to conduct warrantless surveillance under the Bank Secrecy Act.
If you don't know why that's an issue, see @coincenter's lawsuit against the Treasury Department:
coincenter.orgCoin Center has filed a court challenge against the Treasury Dept. over unconstitutional financial...It is a clear overreach for the government to force citizens to spy on each other without a warrant…
19/ There are other areas for improvement in the DCCPA as well, but I’ll leave the critique there for now.
Despite these issues, it’s exciting to see Congress move forward on a crypto bill that gets so much right.
There’s nothing here that can’t be fixed with a few good tweaks.
20/ It’s also worth recognizing the excellent process that Senate Ag has run so far.
Instead of trying to rush something into law quickly (as sometimes happens), the bill’s sponsors are taking their time to understand the issues.
Today's hearing was another solid step forward.
21/ @BlockchainAssn appreciates that committee staff have been so open to dialogue over the last few months.
Follow up tweets:
The bZx action doesn't mean we should abandon the DCCPA, the bill giving the CFTC jurisdiction over digital commodity trades.
It means we should work harder to amend the bill so the law is clear: regulations designed for legacy institutions don't apply to decentralized protocols.
As I said last week, the DCCPA is a good bill when it comes to regulation of centralized custodial platforms.
That's what it's designed for. But it has some flaws, including its potential impact on DeFi. That issue is more important to fix now than ever.