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In early June, Patrick McHenry, Chairman of the House Financial Services Committee, and Glenn Thompson, Chairman of the House Committee on Agriculture, released a landmark draft digital asset market structure bill.
The release of this proposed legislation has been overshadowed in the mainstream press by SEC enforcement actions, but I believe it deserves ample attention - because this bill would not merely protect Coinbase, Ethereum, and the other digital asset service providers and issuers facing existential uncertainty in the US; it would lay the groundwork for a new wave of decentralized businesses and projects to create tremendous economic value that will be shared with their users.
The bill would accomplish what the 1933 Securities Act, which was initially known as the “Truth in Securities” Law, did – not merely protecting ordinary folks from losses, but also enabling a trustworthy and vibrant capital market that has been a keystone in building America’s extraordinary economic engine. If the US is to maintain its position at the center of the world’s capital markets, at a time when Europe, the UK, and Hong Kong are all creating more favorable climates for digital asset businesses, we will need to update our ~90-year-old securities laws for this new technology.
It is a prototypical example of “smart regulation,” which does not merely balance the interests of capital formation with investor protections, but rather implements the sort of protections that encourages capital formation – and, in this case, the creation of decentralized products and services that generate widely shared economic benefits. More specifically, the McHenry-Thompson regime would enforce transparency and nudge projects towards true decentralization, where the benefits of crypto accrue more to end users and network participants.
The bill’s most important provisions clearly defines and makes a distinction between digital asset securities and digital asset commodities, and provides a set of criteria by which tokens can transition from the former to the latter. This is all based on the guiding concept of “sufficient decentralization,” which was initially invoked by then SEC commissioner William Hinman.
The core principle is that while a protocol is more centrally controlled, via ownership of the token supply or authority over code changes, the development team behind it should be subject to disclosure requirements and insider sale restrictions – because there are legitimate concerns about information asymmetries between insiders and outsiders (as with a traditional corporation). Once a protocol is more decentralized in ownership and control (like Bitcoin is today), the risks of information asymmetries are diminished, and private companies can provide the data and insights that investors and users need to make decisions (as is the case in the energy and food commodities markets) - thus strict disclosure requirements are unnecessary.
The bill also allows protocol developers to distribute tokens more broadly. Right now, most pre-launch tokens are only sold to accredited investors using the Reg D exemption, and most protocols refrain from issuing airdrops to US users. Under the proposed legislation, US-based token issuers could sell registered tokens to the public, within limitations that are more sensible than current accredited investor laws – instead of barring people from investing if they don’t hit minimum wealth or income thresholds, anybody could invest up to 5% of their net worth or income in a given offering. Protocols could also make “end-user distributions,” via airdrops and staking rewards, from the outset. This would provide much broader access to the growth potential of these new assets.
Additionally, the bill provides a clear framework for companies to register both digital asset securities exchanges and digital commodities exchanges. The former would be subject to SEC jurisdiction, while the latter would be subject to CFTC oversight. Today, it is essentially impossible to register a digital asset securities exchange, nor is there a framework for federally registering a digital asset commodities exchange. These exchanges would be subject to both time-tested and sensibly tailored customer protection rules – a huge improvement on the status quo.
Some casual observers wonder if crypto is worth preserving in the US given the “lack of use cases.” Real world adoption of crypto is underappreciated and often understated, but it is also limited by the lack of a clear and reasonable regulatory framework in the US.
If a bill with these principles were to become law, I believe we would see radical improvements in the most well-known crypto use cases (DeFi, NFTs, and stablecoins), and still nascent use cases that could thrive under a new framework. These include (1) decentralized social media, as new US-based startups and established incumbents could issue tokens that allow creators to better share in the economic value they create, (2) decentralized physical infrastructure, as protocols offering decentralized cloud storage or telecom networks could more easily integrate their products into legacy systems, (3) regenerative finance, as the tokenized carbon credit market could take off under this framework, and (4) decentralized science, which is a movement primarily based on the ability to crowdfund and coordinate important research in biology and beyond.
This bill would not only allow crypto to thrive, but potentially fuel the US economy more broadly. Most US industries have become increasingly concentrated and monopolistic over the past few decades – exacerbating inequality, crimping growth, and kicking off a vicious cycle of increasing political capture. The bill would enhance competition in our economy by enabling new entrants to build innovative decentralized solutions for a wide variety of industries.
This ambitious bill is not perfect, and there are areas that will need be better addressed within the bill and perhaps with separate legislation over time – including DeFi (which has very different considerations from the centralized exchanges that the bill explicitly regulates), NFTs (the bill should ensure that collectibles and in-game assets are not unreasonably deemed securities), and stablecoins (which are defined in the bill, but will need its own federal framework to ensure that regulated US-based companies can compete with unregulated offshore issuers to proliferate dollars around the world). And there are still ambiguities or gaps around insiders’ ability to contribute to protocol governance, legal liability of DAO participants, and other topics.
But all-in-all, the basic tenets of this bill have the potential to enable a maturation of the industry that both crypto enthusiasts and crypto skeptics should support. Importantly. the shady behavior of companies like FTX and others would not be possible under this new framework.
If and when a market structure bill like this passes, it will have some meaningful changes based on industry feedback and compromises within Congress. Hardcore crypto enthusiasts and haters will each find elements they dislike. But if the final law embodies this version’s principles, it will represent a dramatic improvement upon the status quo – not just for crypto, but for the US economy as a whole.