WASHINGTON, DC – JUNE 14: Rep. French Hill (R-AR) is leading the charge on new crypto regulatory efforts in congress (Photo by Anna Moneymaker/Getty Images)
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The 136-page complaint against Binance filed by the Securities and Exchange Commission on Monday illustrates much of what is wrong with U.S. cryptocurrency regulation, according to French Hill, the Arkansas Republican who is guiding legislation to change that. SEC officials “were out prosecuting Kim Kardashian for promoting crypto on TV and social media,” he says, while Binance was squirreling billions of dollars away on a business that spent half a decade operating with alleged disdain for U.S. rules, “right under their noses.”
Hill put some of the blame on a lack of alacrity on the SEC’s part, but he also noted that existing American law does not really fit crypto.
Speaking about a litany of allegations in the complaint, he chalked them up to “the fact that we don’t have rules of the road or a regulatory framework” for the digital-assets industry.
Hill is a co-sponsor of a joint bill from the House Financial Services and Agriculture Committees that is meant to provide guidelines. The initial draft of the legislation only reflects Republican input, but congressional Democrats and the White House are aware of the key points, which Hill says will allow the current version to be a jumping-off point for discussions.
The lawmaker told Forbes that a major reason why this bill was not bipartisan from the start is that it did not have the same foundation of across-the-aisle support as stablecoin legislation, which was worked on jointly last fall by then Financial Services chair Maxine Waters (D-CA) and ranking member Patrick McHenry (R-NC).
Key elements include pathways to registration for exchanges dealing in digital assets with the SEC and the Commodity Futures Trading Commission (CFTC), which oversees crypto derivative markets such as bitcoin futures or ether options contracts, but under this bill would also be given authority over previously unregulated spot trading. ”We wanted to live within the SEC and CFTC’s frames of reference,” says Hill. “We show a much clearer migration between something that starts out as a security could eventually trade over on a commodity based market.”
Exchanges would have the option to register with the SEC as alternative trading systems (ATS). Such services are closer to the all-in-one model of trading that is common in the crypto world than to traditional national financial markets such as the New York Stock Exchange, which concerns itself mainly with transactions while brokerage, custody, settlement and clearing are undertaken by other participants. Gary Gensler, the SEC chairman, has reportedly been cool to the idea of letting crypto exchanges apply for ATS licenses.
The most contentious part of the bill is likely to be a section that lets registered exchanges issue an application to contend that a specific asset is sufficiently decentralized to fall outside of the definition of a security. According to the Howey Test, a framework based on a 90-year judicial precedent involving citrus groves in Florida, the level of concentration of power or ownership over a given project or its tokens could determine if the cryptocurrency is a security.
In adopting this approach, the bill is borrowing a self-certification strategy that has been a bedrock of the CFTC’s approval process for new futures contracts. The House Agriculture Committee seems to be tackling the issue “with forms and processes that are familiar in the CFTC world and may be less familiar in the SEC world, says Christopher Giancarlo, former chair of the CFTC.
However, it may not be quite as foreign as people think. Self-certification is “not an alien concept in the SEC when it comes to reviewing an S-1 for someone going public,” says Hill.
This point is one of many key questions expected to be discussed at a timely hearing at 10 a.m. Washington time on Tuesday before the full House Agriculture Committee More important than the mechanics of the bill is the debate over if and when a token that began life as a security can become sufficiently decentralized to become something else.
Giancarlo, one of the witnesses testifying at the hearing told Forbes that in his upcoming written testimony, “I talk about the way the bill goes about confirming whether protocol is sufficiently decentralized or not. I think some of that needs some better refinement, and I imagine that both agencies are gonna have a lot to say about that.”
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