On June 24, Senate Banking Chairman Tim Scott (R-SC), Subcommittee on Digital Assets Chair Cynthia Lummis (R-WY), Senator Thom Tillis (R-NC), and Senator Bill Hagerty (R-TN) released a set of guiding principles for the development of comprehensive market structure legislation for digital assets. These principles, described in more detail below, aim to provide a foundational framework for discussions and negotiations with industry participants, legal and academic experts, and government stakeholders. This announcement comes on the heels of the House Committees on Agriculture and Financial Services both favorably reporting to the House the CLARITY Act (discussed here), which aims to establish a clear regulatory framework for digital assets in the United States. and the recent passage by the U.S. Senate of the GENIUS Act, a landmark effort to establish a comprehensive federal framework for the payment stablecoins (discussed here).
Defining the Legal Status of Digital Assets
There should be a clear distinction between digital asset securities and digital asset commodities. Fixing this distinction in statute will provide predictability, legal precision, and much-needed regulatory certainty.
Allocating Jurisdiction Among Regulators
A key focus of the principles is the allocation of regulatory authority. Legislation should prevent the emergence of an all-encompassing regulator by clearly defining jurisdiction in statute. The principles acknowledge the varying risks and benefits associated with centralized firms, decentralized finance protocols, and non-custodial software platforms, advocating for tailored regulation. Additionally, the principles emphasize the preservation of self-custody of digital assets and the non-financial use of distributed ledger technology (such as to manage health care data), which would not be regulated as financial products.
Modernizing Regulation to Foster Innovation
Recognizing the unique nature of digital assets, the principles call for modernized regulations. This includes a new Securities and Exchange Commission exemption for certain digital asset fundraising and revisiting burdensome registration requirements to provide a clear pathway to compliance for “good faith” innovative actors (though the guidelines are silent as to how such actors are to be distinguished from those that should be subjected to greater scrutiny or barred from the US market). Legislation should establish pro-innovation principles for trading digital assets on the secondary market and acknowledge tokenization as an evolution of financial infrastructure.
Protecting Digital Asset Purchasers and Traders
The principles propose innovation-friendly registration and risk management requirements for centralized digital asset intermediaries, similar to those for other centralized intermediaries. These requirements could encompass illicit finance compliance, adequate capital, custody and segregation requirements, and enforcement authority. Additionally, legislation should protect customer funds during bankruptcy. We note that the 2022 bankruptcies of numerous centralized finance platforms demonstrated the critical need for such protections, while the proposed amendments to the Bankruptcy Code in the Senate’s GENIUS Act show the challenges in crafting such protections while balancing competing interests.
Targeted and Pro-Innovation Illicit Finance Measures
To prevent money laundering and sanctions evasion, the principles suggest a targeted package of measures. These include adopting examination standards and extending the Bank Secrecy Act and International Emergency Economic Powers Act to entities abroad with U.S. touchpoints. The reforms also consider how digital assets can enhance transparency and efficiency in detecting illicit activity.
Welcoming Responsible Innovation by Federal Financial Regulators
The principles advocate for federal financial regulators to embrace responsible innovation through no-action guidance, sandboxes, safe harbors, and coordination. Clear guidance affirming the permissibility of crypto-related activities for banks and financial institutions is encouraged, provided they do not threaten institutional safety and soundness. This guidance aims to foster accountability and enable consistent application of regulations.
Timing and Legislative Context
Republican senators have committed to finalizing the digital asset market structure legislation by September 30, underscoring the urgency of delivering on President Trump’s aim to make the U.S. the cryptocurrency capital of the world.