Digital Asset Enforcement: Between Proposed Legislation and CFTC Enforcement

At a Glance

• On April 17, 2024, Senators Gillibrand and Lummis introduced the Payment Stablecoin Act, a bill less comprehensive than their Responsible Financial Innovation Act, but which aims to regulate a specific digital asset: stablecoins.
• While great progress has been made in introducing legislation that aims to regulate digital assets, it is yet to be determined whether any of this legislation will pass both chambers of Congress and be introduced into law.
• Given the CFTC’s success in FY 2023 with its enforcement actions, we should expect to see more high-profile actions brought by the CFTC in the digital asset space. Therefore, it is important for entities implementing projects that involve digital assets to fully understand the CFTC’s regulatory authority.

While most people would agree that bitcoin and cryptocurrency would be classified as digital assets, no one has quite defined what exactly is a digital asset. The Commodities Futures Trading Commission (CFTC) released a primer in December 2020 to educate the public on its view of digital assets. The CFTC acknowledged that “a single, widely-accepted definition” of digital assets has “yet to emerge.” However, the CFTC noted that digital assets can be understood as “[a]nything that can be stored and transmitted electronically and has associated ownership or use rights.” While digital assets have proliferated rapidly during the last few years, rules and regulations for digital assets have lagged behind.

In 2022, U.S. Senators Kirsten Gillibrand (D-NY), and Cynthia Lummis (R-WY) introduced the Responsible Financial Innovation Act. The legislation aimed to create a regulatory framework for digital assets by introducing standards as to which digital assets can be classified as commodities versus securities, providing clarification on the taxation of digital assets, and expanding the CFTC’s jurisdictional authority to include digital asset spot markets. Additionally, the legislation imposed disclosure requirements on digital asset issuers and service providers so that consumers could have a better understanding of what they were buying and what risks were associated with any purchased digital assets. While the legislation was reintroduced in 2023, it has yet to be voted upon.

While the Responsible Financial Innovation Act would have expanded the CFTC’s jurisdictional authority to include digital asset spot markets, the CFTC has relied on its current jurisdictional authority under the Commodity Exchange Act (CEA) to bring actions involving conduct related to digital assets. The CEA gives the CFTC the authority, among other things, to regulate commodities exchanges. Under the CEA, the CFTC has brought digital asset enforcement actions for illegally dealing in off-exchange commodities, accepting orders for commodities trades without registering as a futures commission merchant, and failing to implement effective customer identification programs, among other things. In the federal government’s fiscal year ending September 30, 2023, the CFTC brought 47 such actions; some of these actions included high-profile matters involving the founders and executives of prominent exchanges such as FTX, Coinbase and Binance. The CFTC’s action against Coinbase resulted in Coinbase paying a $6.5 million civil monetary penalty for reckless false, misleading, or inaccurate reporting and wash trading.

On April 17, 2024, Senators Gillibrand and Lummis introduced the Payment Stablecoin Act, a bill less comprehensive than their Responsible Financial Innovation Act, but which aims to regulate a specific digital asset: stablecoins. Stablecoins are a cryptocurrency, designed to have a relatively stable price, tied to the value of an underlying stable asset such as a fiat currency or commodity. The Payment Stablecoin Act authorizes a limited-purpose payment stablecoin charter. The Payment Stablecoin Act also gives the Federal Reserve, the U.S. Department of Treasury’s Office of the Comptroller of the Currency and state regulators the ability to take independent enforcement action against depository companies issuing stablecoins; however, the Federal Reserve and the relevant state regulator must act jointly for trust companies below $10 billion. We also see similar consumer protection provisions in earlier introduced legislation with a receivership regime under the FDIC for paying back customers in the event something goes wrong. The Payment Stablecoin Act has been positively received by banks and ratings agencies.

Analysis

While great progress has been made in introducing legislation that aims to regulate digital assets, it is yet to be determined whether any of this legislation will pass both chambers of Congress and be introduced into law.

In the meantime, the CFTC continues to utilize its enforcement authority under the CEA to bring digital asset enforcement actions. Given the CFTC’s success in FY 2023 with its enforcement actions, we should expect to see more high-profile actions brought by the CFTC in the digital asset space. Therefore, it is important for entities implementing projects that involve digital assets to fully understand the CFTC’s regulatory authority.