House Bill Aims to Limit Big Crypto Firm Influence
The House Republican’s newly released “Digital Asset Market Structure Discussion Draft,” unveiled on May 5th, represents a significant shift in approach towards regulating the burgeoning cryptocurrency market. This document, spearheaded by House Agricultural and Financial Services Committee Chairs Glenn Thompson and French Hill, is being viewed by industry experts as an incremental yet impactful revision of the Financial Innovation and Technology for the 21st Century Act (FIT21). Justin Slaughter, Vice President of Regulatory Affairs at Paradigm, characterized the draft as a “portent of the entire bill,” highlighting its potential to counter concerns regarding the disproportionate influence of large cryptocurrency firms.
A key element of the draft involves a substantial reduction in the threshold for defining an “affiliated person.” Currently, FIT21 stipulated that ownership of more than 5% of a digital commodity required affiliation. The revised draft lowers this threshold to a mere 1%, a move Slaughter believes will actively discourage dominance by large firms and foster greater participation across a broader range of market participants. He asserted that this change reflects a fundamental goal: “This is a portent of the entire bill. There are often criticisms of crypto being too dominated by a few large firms. This bill makes clear the regulatory regime proposed is going to push against that fact and strongly encourage more small-d ‘democratization’ of the space.”
The draft further clarifies the definition of a “mature blockchain system,” specifying that it encompasses the digital commodity and its related system, provided neither is under "common control" by any individual or group. This distinction establishes a benchmark for regulatory oversight, suggesting that regulatory scrutiny will increase as cryptocurrency networks achieve greater decentralization. The Securities and Exchange Commission (SEC) would initially hold primary authority in overseeing activity on these networks, pending their sufficient decentralization.
Furthermore, the draft distinguishes digital commodities, classifying them as “investment contract assets” – a critical distinction that avoids triggering the Howey test, a legal principle utilized to determine if an activity constitutes an investment contract and thus falls under securities law. According to Slaughter’s analysis, securities laws would only be triggered if secondary sales of tokens simultaneously transferred ownership or profit associated with the underlying business.
To provide a clear pathway for cryptocurrency firms seeking to raise capital, the draft outlines a process that would allow them to operate under SEC oversight while simultaneously navigating registration requirements with the Commodity Futures Trading Commission (CFTC). The committee members stated that joint rulemaking, procedures, or guidelines relating to digital asset delisting would be established by the CFTC and SEC should a registered asset no longer comply with regulatory rules.
The Republican-led initiative directly addresses criticisms levied against the previous Biden administration’s approach, which was characterized by a strategy of “regulation by enforcement,” led by the SEC under Gary Gensler. The committee members contend that this approach created uncertainty and “legal limbo” for many industry players, driving some to relocate their operations overseas, where more accessible regulatory frameworks existed. They emphasized the importance of establishing a “commonsense regulatory regime” to unlock America’s potential as a global leader in digital asset investment and innovation, specifically by modernizing America’s financial infrastructure and bolstering US dollar dominance.
However, the Republican effort is already facing resistance within the House Financial Services Committee. Maxine Waters, the Ranking Member, intends to block a Republican-led event planned for May 6th focused on discussing the digital assets draft. According to a Democratic staffer, the requirement for all members of the House Financial Services Committee to agree on such hearings presents a significant hurdle.
The release of this discussion draft signals a renewed focus on developing a comprehensive framework for cryptocurrency regulation within the United States, aiming to balance innovation with investor protection and solidify America’s position in the evolving digital asset landscape.
