A new Senate bill focuses on cryptocurrency exchanges. Here’s what developers and users should keep an eye on.

Today Senate Agriculture Committee Chairwoman Stabenow, Ranking Member Boozman, Senator Booker, and Senator Thune introduced the Digital Commodities Consumer Protection Act of 2022. It seeks to regulate cryptocurrency exchanges as CFTC-supervised commodities brokers, dealers, custodians, and trading facilities.

We’re grateful that they’ve taken a careful approach to developing this legislation and been willing to work with us to ensure there are no unintended consequences. As we detail below, however, we have reservations about the breadth of definitions for regulated activities and we believe there is a need for a clearer exemption of persons engaged in constitutionally protected activities such as publishing software.

By and large we appreciate the goal of the legislation. In 2018 we published a report calling for an alternative federal regulatory regime for cryptocurrency exchanges, recognizing that state money transmission licenses both underprotected consumers while nonetheless overburdening businesses. At the end of that report we put forward several potential solutions, among them a CFTC-run optional registration and supervision regime for digital commodities exchanges.

Such a regime would accomplish many objectives, including (1) simplifying the patchwork of state money transmission regulations for registered businesses, (2) ensuring uniform consumer protections for customers of CFTC-supervised exchanges irrespective of their state of residence, and (3) lessening pressure on the SEC to act to regulate exchanges trading non-securities.

Digital commodities like Bitcoin are not securities, but the exchanges on which they trade face similar investor protection challenges as securities exchanges: large scale retail participation and highly volatile markets. The CFTC only regulates commodities derivatives markets so rather than direct the SEC to regulate non-securities markets, this approach simply gives the existing commodities regulator authority to regulate digital commodities spot markets.

This idea first made it into legislation in the House in 2020. The Digital Commodity Exchange Act of 2020 was sponsored by Congressman Conaway and had bi-partisan support from Congressmen Emmer, Soto, Schweikert and Johnson. It describes an optional registration and supervision regime for digital commodities exchanges and it has now been reintroduced this Congress by Ranking Member Thompson.

The Digital Commodities Consumer Protection Act now gives us a Senate-side version of this idea. However, there are some important differences that are particularly relevant to protecting the civil rights of developers and users of these technologies. The Senate version puts forth more regulated categories than merely exchanges; it regulates brokers, dealers, custodians, and trading facilities, each of which is defined. Additionally, the regime proposed in the Senate is not optional. If you meet the definition of any of these categories of “digital commodity platforms” you must register or face penalties. There is a serious risk of overreach and unintended consequences when registration is mandatory rather than optional.

As we always stress, a mandatory registration regime should not apply to persons who are merely writing or publishing software, relaying or validating transactions on a permissionless network, or using that network for personal purposes. Mandatory registration of these activities would not only crush the innovative nature of these technologies with unnecessarily burdensome requirements, it would also violate our constitutional rights to speech and privacy.

Fortunately the authors of the Senate bill have been sensitive to these concerns and willing to work on narrowing the language and providing clear exemptions. To that end, the definitions of “broker,” “dealer,” and “trading facility” all include an exclusion for “a person solely because that person validates digital commodity transactions.” We are grateful for this clarity as regards miners and stakers. However, we do not think the exclusion is broad enough to encompass other constitutionally protected activities, specifically publishing software and relaying transaction messages (i.e. node operation).

Additionally, the definition of “dealer” appears to include persons who are merely buying and selling cryptocurrencies for their own account. We are certain this is not the authors’ intent, and, perhaps that would be clear to a seasoned commodities derivatives lawyer who is accustomed to interpreting terms like “dealer” in the context of commodities trading. Much appears to hinge on whether the buyer/seller is engaged as “an identifiable business,” but many traders make a business out of their trading activities even though they are not acting on anyone else’s behalf, and therefore do not warrant a registration requirement. We need to be sure that ordinary buyers and sellers of cryptocurrency are also not swept into a registration regime and we hope the text of the bill can be made clearer to that effect.

As this bill continues to work through the legislative process we will continue to work to address these concerns.