Table of Contents
- Overview: Crypto-Currency Act of 2020 (TL;DR)
- What is the Purpose of the Crypto-Currency Act?
- The Crypto-Currency Act of 2020, Section by Section
- Section 1: Name
- Section 2: Digital asset and federal crypto regulator definitions
- Section 3: Duties of each “Federal Crypto Regulator”
- Section 4: Informing the Public and Keeping Records
- Section 5: FinCEN’s Tracing of Transactions
Overview: Crypto-Currency Act of 2020 ( TL;DR)
After a tumultuous year for cryptocurrencies that saw the introduction of the Financial Action Task Force’s Recommendation 16 “travel rule”, the announcement of Facebook’s controversial Libra stablecoin, as well as increasing action from the Financial Crimes Enforcement Network (FinCEN) and other U.S. regulators, the last month of the decade delivered one final shock.
In December 2019, the U.S. Congress introduced a new draft bill that guides the way forward for how U.S. lawmakers will oversee and regulate virtual assets in the new decade. The so-called “Crypto-Currency Act of 2020” can be viewed as a unified Federal regulatory response and a direct countermeasure to the threat that stablecoins such as Libra and largely unregulated cryptocurrencies like Bitcoin pose to the traditional financial industry.
In short, the Crypto-Currency Act of 2020 proposes the following:
1. It divides digital assets into 3 different categories:
- Crypto-currency: blockchain-based “synthetic derivatives”
- Crypto-commodity: blockchain-based “economic goods or services with substantial fungibility”
- Crypto-security: blockchain-based “debt, equity, and derivative instruments”
2. It defines 3 U.S. regulatory agencies as “Federal Crypto Regulators”
- Financial Crimes Enforcement Network (FinCEN)
- Commodity Futures Trading Commission (CFTC)
- Securities and Exchange Commission (SEC)
3. Each Federal Crypto Regulator is assigned a digital asset to regulate with sole authority
The Financial Crimes Enforcement Network (FinCEN) will regulate crypto-currencies, the Securities and Exchange Commission (SEC) will take charge of crypto-securities, while the Commodity Futures Trading Commission (CFTC) will handle all defined crypto-commodities.
4. The Rest
- The three regulators are required to retain and share an up-to-date list of current Federal licenses, certificates and registrations with the public that are needed to create virtual assets or trade them.
- The Act mandates the Treasury Secretary, at present Mr. Steven Mnuchin, an outspoken critic of unregulated cryptocurrencies, to create regulation by way of FinCEN to help track the transactional flow of cryptocurrencies.
- Interestingly, in a clear reference to Libra, under its Crypto-currency definition, it also look at “stablecoins”, stable-value digital assets (which aim to represent the value of real-life fiat currencies such as the U.S. Dollar or combinations thereof) into reserve-backed stablecoins (backed 1:1 by a real-world asset in a bank account) and synthetic stablecoins (not reserve-backed).
- It also defines a “Decentralized Oracle” for services that transmit or verify external data outside of a blockchain to help execute smart contract functions.
What is the Crypto-Currency Act of 2020’s purpose?
To bring “regulatory clarity to cryptocurrencies”.
On 20 December 2019, various media reported that U.S. Congressman Mr. Paul Gosar (Arizona Republican) introduced the draft bill to the House of Representatives in order to bring “regulatory clarity” to cryptocurrencies. This entailed defining various types of digital assets and assigning federal regulators to police digital assets that fall in their jurisdiction.
The Crypto-Currency 2020 Act: Section by Section
Section 1: Name
The opening part of the Act declares that it “ may be cited as the Crypto-currency Act of 2020”.
Section 2: Definitions- Digital Assets & Regulators
The second part of the Act clearly distinguishes between the different types of digital assets, crypto federal regulators as well as stablecoins.
2.1 Digital Assets
1) What is a “digital asset” according to the Act?
The Crypto Act kicks off by dividing digital assets into 3 distinctly different categories:
2) What is a “crypto-commodity”?
Crypto-commodities are defined as
1) “economic goods and services” that have 2) some type of “substantial fungibility”, which 3) the markets deal with irrespective of who produced these goods and services and 4) which reside on a “ decentralized blockchain or cryptographic ledger”.
3) What is a “crypto-currency”?
Described by the proposed draft as “representations of United States currency or synthetic derivatives resting on a blockchain or decentralized cryptographic ledger”, the “Crypto-currency” definition also includes:
- Reserve-backed digital assets that are completely collateralized in a corresponding bank account, backed by real-world assets in a 1:1 ratio.
- Synthetic derivatives which are “determined by decentralized oracles or smart contracts and collateralized by crypto-commodities, other crypto-currencies or crypto-securities. “
Interestingly, the definition appears to categorize reserve-backed stablecoins such as Libra as a crypto-currency. The proposed draft adds:
“The Secretary of the Treasury, acting through FinCEN, shall issue rules to require each crypto-currency (including synthetic stablecoins) to allow for the tracing of transactions in the crypto-currency and persons engaging in such transactions in a manner similar to that required of financial institutions with respect to currency transactions,”
4) What is a “crypto-security”?
A crypto-security is defined by the Crypto-Currency Act of 2020 as “all debt, equity, and derivative instruments that rest on a blockchain or decentralized cryptographic ledger”. However, the definition excludes synthetic derivatives that operate and are registered as money service businesses (MSBs) in compliance with the Banking Secrecy Act (BSA) and other federal AML/CFT regulators such as FinCEN and OFAC (the Office of Foreign Assets Control).
A crypto-security in the U.S. law can broadly be defined as a digital asset that passes the Howey Test (created by the Supreme Court in 1946 in a landmark case) and are therefore subject to securities regulation if it fulfills these requirements:
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
5) “Decentralized Oracles”
“The term ‘‘decentralized oracle’’ means a service that sends and verifies real-world data from external sources outside of a blockchain and submits such information to smart contracts that rest on the blockchain, thus triggering the execution of predefined functions of the smart contract. “
2.2 “Federal Crypto Regulator”
What is a “Federal Crypto Regulator” according to the Act?
The term ‘‘Federal crypto regulator’’ means:
- (A) the Commodity Futures Trading Commission (CFTC), with respect to crypto-commodities;
- (B) the Secretary of the Treasury, acting through the Financial Crimes Enforcement Network (FinCEN), with respect to crypto-currencies;
- (C) the Securities and Exchange Commission (SEC), with respect to crypto-securities.
Section 3: Duties of Federal Crypto Regulators
In its third section, “Establishing Areas of Regulatory Oversight for Digital Assets”, the Act allocates regulatory duties as follows:
(a) CRYPTO-COMMODITIES.—The Commodity Futures Trading Commission shall be the sole Government agency with the authority to regulate crypto-commodities.
(b) CRYPTO-CURRENCIES.—The Secretary of the Treasury, acting through the Financial Crimes Enforcement Network, shall be the sole Government agency with the authority to regulate crypto-currencies (other than synthetic stablecoins).
(c) CRYPTO-SECURITIES.—The Securities and Exchange Commission shall be the sole Government agency 20 with the authority to regulate crypto-securities and synthetic stablecoins.
The CFTC to regulate crypto-commodities
For the Commodities Futures Trading Commission, if the bill is accepted then it means that the CFTC will have to regulate and develop a framework for the crypto-commodity asset class, which is expected to boom in the coming years, from scratch.
New chairman Heath Tarbert, sworn in during June 2019, already made his voice heard in October last year by confirming that Ethereum is also a commodity and not a security in the eyes of the CFTC, which supports the organization’s viewpoint since 2015 that they consider virtual currencies like Bitcoin, the world’s most popular digital asset, to be commodities.
These new powers will strengthen the CFTC chairman’s hand in the future when it comes to clearly demarcating the CFTC’s area of regulation.
The SEC to regulate crypto-securities
Crypto-securities on the other hand, will stay under the wary gaze of the Securities & Exchange Commission. The hands-on SEC has in recent years turned down every single Bitcoin exchange-traded fund (ETF) application and started to crack down on “illegal” security offerings such as the ICO boom in 2017 and went after EOS creator Block.One in 2019 with a $24million settlement.
However, the SEC chairman Jay Clayton laid the Ethereum community’s fears to rest in September 2019 by stating that the world’s second-biggest cryptocurrency is indeed “definitely not a security”.
FinCEN to regulate crypto-currencies
Meanwhile, FinCEN will regulate crypto-currencies used in transactions as types of virtual money in accordance with their AML/CFT policy as well as established KYC protocols.
Most importantly for regulators, they want to devise a method to trace the real identities behind virtual currency transactions, in order to clamp down on money laundering and terrorism funding.
This is in line with more responsibilities that the U.S. Congress has bestowed on FinCEN last year.
For example, in September 2019 the House of Representatives approved the bill “Advancing Innovation to Assist Law Enforcement Act” to allow the incumbent FinCEN director to undertake a study within the agency on how emerging technologies such as blockchain are used.
In 2019 FinCEN took a strong stance against unregulated cryptocurrency transacting with their May 2019 CVC Guidance, which tied together nearly a decade of crypto rules and regulations.
The agency’s director Mr. Kenneth A. Blanco also made it very clear that money service businesses (MSBs) that deal with crypto and do not follow the Banking Secrecy Act (BSA) will be targeted.
In October Mr. Blanco foreshadowed the proposed Act and its focus on stablecoins, by declaring that stablecoin issuers are “money transmitters” and therefore subject to the BSA’s so-called Travel Rule. In December 2019 Mcor. Blanco expressed his satisfaction with how crypto businesses were responding to regulations. With this new regulatory carte blanche from the U.S. Congress, expect FinCEN to make bold moves in 2020 against crypto-dealing money service businesses who break BSA regulations.
Graph: Federal Crypto Regulators vs Digital Assets
Section 4: Informing the Public and Keeping Records
“SEC. 4. AVAILABILITY OF INFORMATION TO THE PUBLIC ON REQUIREMENTS TO CREATE OR TRADE IN 3 DIGITAL ASSETS.”
Each Federal digital asset regulator shall, with respect to digital assets regulated by the Federal digital asset regulator, make available to the public (and keep current) a list of all Federal licenses, certifications, or registrations required to create or trade in digital assets. “
Section 5: FinCEN Rules to Trace Transactions
According to the proposed bill, Transaction-tracing mechanisms must be established as follows:
“(T)he Secretary of the Treasury, acting through the Financial Crimes Enforcement Network (FinCEN), shall issue rules to require each crypto-currency (including synthetic stablecoins) to allow for the tracing of transactions in the crypto-currency and persons engaging in such transactions in a manner similar to that required of financial institutions with respect to currency transactions under subchapter II of chapter 53 of title 31, United States Code.”
The Cryptocurrency Act of 2020 seems to be a logical next step for the CFTC, SEC and FinCEN after their joint statement in October 2019, where agency heads Tarbert, Blanco and Clayton reminded “persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA).”
There is no official date for its proposal to or possible adoption by the U.S. Congress yet determined, however, the Crypto-currency Act is expected to come to a vote at some time this year. This follow-up initiative to the Token Taxonomy Act of 2019 (which aimed to bring Libra under the oversight of the SEC) seems to be a new attempt to further clarify the regulation of cryptocurrencies. At a minimum, it shows that lawmakers are now increasingly viewing cryptocurrencies as both a viable asset class and a serious threat to the financial status quo if not managed correctly.
After Libra’s introduction, regulators are now aware that digital assets will be poised to reshape the global economy over the next decade, and as such, need to be proactively kept in check through clearer regulations and all the tools that American jurisprudence and federal agencies have at their disposal.
While these regulations and legislation can be tough for outsiders to digest, cryptocurrency investors and supporters can take heart. By increasingly regulating digital assets like traditional assets, authorities are helping to make them more palatable for mainstream investors. In this context, regulation may, in fact, be a key component of not just the survival but also the prosperity of digital assets in the coming years.