17th timeʼs a charm? US lawmakers write another crypto bill

US lawmakers are working on the Digital Asset Market Structure bill, adding to the 16 existing pieces of digital assets legislation introduced since the Biden administration.

The House Committee on Financial Services published a discussion draft of the bill on April 5. The draft mainly draws details from the Financial Innovation and Technology for the 21st Century Act (FIT21); which was passed by the House of Representatives during the previous Congress, but did not complete the legislative process.

The main difference between FIT21 and the new bill is the introduction of a decentralisation test, and a shift to make the US Commodity Futures Trading Commission (CFTC) the primary regulator of the digital assets space, rather than the US Securities and Exchange Commission (SEC).

Jim Falvey, a Chicago-based lawyer and compliance expert, told Compliance Corylated: “There are two main regulators that are particularly focused on this [crypto regulation]. Plenty of regulators are interested, but from an enforcement perspective, it’s really the SEC and the CFTC.

“Both agencies are making efforts to demonstrate their interest in digital assets, holding roundtables, conferences and discussions. They’ve set up working groups, committees and other formalities. A lot of it feels as if they are lobbying Congress and the president to get the plum assignment of regulating crypto in the US,” added Falvey, who has worked as general counsel, chief compliance officer and in other roles in financial markets, including digital assets/crypto, since 1995.

Four pieces of legislation related to digital assets have been introduced since the early days of President Donald Trumpʼs second administration, in support of his vision to make the US the “crypto capital of the world”. The new legislative proposals, introduced by both the Senate and the House, counter with Biden-era drafts, which took a more traditional approach to digital assets.

Starting in February, congresswoman Maxine Waters announced a discussion draft of the Waters-McHenry Bipartisan Stablecoin Bill, addressing compliance standards on non-US based stablecoin companies. This is followed by the STABLE Act, which passed through the House Financial Services Committee on March 30, while the US Senate is also considering another bill to regulate stablecoins, the GENIUS Act, passed by the Senate Banking Committee on April 2.

The GENIUS Act has already run into political headwinds as Democrat senators are withdrawing support and pushing for new legislation that would ban lawmakers and their families from issuing digital assets, citing Trump family ties to crypto ventures. Ultimately, however, US stablecoin legislation could be a mix and match from all three bills.

Falvey explained: “A bill goes to committee, and there may be one or several hearings, depending on how complex or important the issue is. If the committee decides to move forward, they “mark up” the bill — that’s the term used for when they amend and revise it. They’ll make changes, add new language, or remove sections.

“Sometimes they’ll borrow language from other bills, for example, stablecoin provisions, and merge it into the main bill. Other times, they’ll reject it entirely. It really depends on how much support or lobbying is behind it, or what the executive branch — especially Trump’s team — wants,” he added. “It’s all a negotiation. That’s what people mean when they talk about ‘sausage makingʼ in legislation. It’s messy, it’s political and it’s constantly shifting.”

Digital assets classification

Once approved by both Houses and signed by the president, the Digital Asset Market Structure bill will require all digital asset exchanges, brokers and custodians to register with a regulatory body and fulfil their compliance obligations.

Under FIT21, the CFTC oversees “digital commodities” while the SEC is designated to regulate “restricted digital assets”. However, the draft bill introduces the concept of “qualified digital commodities”, which involves a test to determine whether a crypto entity is “decentralised enough” to be classified as a commodity and registered with the CFTC under section 204.

“Basically it’s a whole new regulatory regime,” said Falvey. “If their value is tied to a blockchain system, they will fall under the category of digital commodities, unless they are considered stablecoins or securities”.

Legislating away the Howey Test problem

While the rule is expected to settle the debate among US financial regulators on whether crypto assets are classified as securities or commodities, the new bill is also introducing a new classification of “emerging digital assets”, specifically targeting tokens that do not fit into either category.

“Congress is attempting to clarify that standard but the result is actually more confusion. Under the proposed bill, digital assets — now being referred to as digital commodities instead of crypto — will be treated differently depending on how they function — that doesn’t really make anything clearer,” said Falvey.

The classification of digital assets functions similarly to the Howey Test, the main legal standard used in the US to determine whether something is a security. Falvey believes that the new crypto bill “is essentially legislating the Howey Test away, replacing it with new legal standards”.

CFTC vs SEC

The Digital Asset Market Structure bill generally designates the CFTC as the primary regulator rather than the SEC. Section 401 gives the CFTC new authority to regulate certain digital asset transactions — for example, it will have exclusive control over cash or spot markets for digital commodities, extending its existing authority to stop fraud and market manipulation in all commodities markets.

Falvey used the example of electricity to explain the impact. “While it’s traded as a derivative on NYSE, the CFTC doesn’t regulate the spot market for electricity. They can request data or subpoena exchanges, but they don’t have enforcement power over spot trades themselves. This bill would significantly expand their authority in the crypto space.”

The CFTC will also gain authority over transactions by payment stablecoins if they occur on a CFTC-registered platform. CFTC-registered exchanges could also be authorised to offer trading in stablecoins, other digital assets, and probably derivatives as well — “which makes sense,” according to Falvey, “since derivatives are very much the CFTC’s area of expertise”.

Any SEC-registered custodian that offers a cash or spot market in a digital commodity must also register with the CFTC under section 308. This means that if an SEC-registered firm wants to offer trading in digital commodities, it must also comply with CFTC regulations and register with the agency, thereby shifting regulatory power towards the CFTC.

Room for new SRO?

However, the new bill also opens the door for self-regulatory organisations (SROs) to get involved, said Falvey. “The National Futures Association (NFA) will likely take the lead on overseeing these registrations, especially for brokers and advisors. But there’s additional groups trying to position themselves as the primary SRO for crypto, like FinTank or the Global Digital Asset & Cryptocurrency Association, and they could compete for that role.”

In addition, section 201 exempts some digital asset sales from the usual securities laws but any brokers or dealers involved in offering or selling under this exemption must be registered with the SEC.

White Houseʼs cheering

Many congressional officers believe that the Digital Asset Market Structure Bill would remove companies from this “legal limbo” and provide the sector with “much-needed” regulatory certainty. Dusty Johnson, chair of the US House subcommittee on commodity markets, digital assets, and rural development, claimed that the US needs to be “the powerhouse for digital asset investment and innovation”, and described the bill as a “commonsense regulatory regime”.

The Digital Asset Market Structure bill, along with the other proposed acts, are expected to be on the president’s table by August, Bo Hines, Trump’s executive director of advisors on digital assets, said in an interview.

We asked the US regulatory expert, Falvey if the timeline is possible. “They could fast-track it, but I’d be a bit surprised if anything gets done by the end of the year. Members of Congress take quite a lot of time off,” he said.