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Yesterday, U.S. legislators unveiled an eagerly awaited digital assets legislation. The crypto community had hoped that this bill would rectify the perceived adversarial stance regulators have taken against the industry. However, a number of experts believe that the bill might not restrict the SEC’s enforcement approach to digital assets as intended due to its ambiguous provisions.
Billy Sebell, the executive director of the XDC Foundation, voiced concerns during an interview, stating that the bill might further confuse the already complex crypto regulation scenario. Meanwhile, Gabriel Shapiro, the general counsel for Delphi Labs, expressed on Twitter that many DeFi assets, including liquidity staked tokens, remain vulnerable under the bill’s language. He termed this as a potential “backdoor DeFi ban.”
The bill, named the Financial Innovation and Technology for the 21st Century Act, is primarily championed by Republicans such as Glenn Thompson (R-PA), Rep. French Hill (R-AR), and Rep. Dusty Johnson (SD-AL). This comprehensive 212-page document brings forth new definitions related to digital assets, identifies specific exemptions, and proposes a registration mechanism for cryptocurrency exchanges with both the SEC and the CFTC.
D.C.-based Cato Institute’s policy analyst, Jack Solowey, pointed out that the recent draft presents some marked changes from its previous iteration that House Republicans had released in June. A significant difference is how the bill now treats digital tokens. The updated bill distinguishes tokens from the context of their sale, whereas the prior version deemed tokens as securities if they were part of an investment contract. Solowey believes that this amendment might have been influenced by a recent favorable ruling for Ripple Labs by a federal judge.
How Much Decentralization is too Much?
However, the bill’s stance on the registration process has garnered mixed reactions. SEC Chairman Gary Gensler believes that many crypto projects are possibly not in compliance, with most refraining from registering with the SEC. On the other hand, the industry argues the absence of a clear registration pathway. This bill aims to rectify that by defining what “sufficiently decentralized” means in a legal context, providing clarity on who needs to register with the SEC. Despite this, Elizabeth Boison of Hogan Lovells law firm believes that the bill still gives the SEC a wide discretion on determining what qualifies as “sufficiently decentralized.”
This ambiguity has been a point of contention for many in the crypto space, who feel that the SEC has not provided clear guidelines to sidestep potential enforcement actions. Still, some Democrats on the House Agriculture Committee believe the bill is overly favorable to the crypto sector. Jeffrey Blockinger, the chief legal counsel at Vertex Protocol, emphasized the political challenges the bill might face, especially given concerns Democrats have voiced about weakening the SEC’s authority. Recollecting the last bill discussion in June, he mentioned the skepticism surrounding the failed crypto exchange FTX and its founder Sam Bankman-Fried’s controversial donations to legislators. Blockinger concluded by expressing doubts about Congress intervening in the SEC’s decisions in a way that could be perceived as aiding the crypto industry.
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