In recent months, members of Congress have introduced a wide variety of bills seeking to create a new federal regulatory regime for digital assets. NASAA, which is an umbrella organization for state and provincial securities regulators in the US, Canada and Mexico, recently submitted a letter to Congress critical of one such bill that lays out a series of arguments more broadly against federal action.
We believe that the current prospects of passing any federal laws on the comprehensive regulation of digital assets are remote. Advancing a grand, bipartisan bargain across Congress seems too unlikely in light of the impending mid-term election and the widely varying political and public policy views on issues surrounding federal regulation of digital assets. There is little consensus among members of Congress on the topic, with some influential legislators believing the asset class should be outlawed entirely, others believing there should be little to no federal regulation lest it crimp innovation and competition, and a great number in the middle who have neither formed views nor become familiar with the basic operation and utility of digital assets. Many of the current bills seek to redefine the term “security” in one way or another so as to limit or strip jurisdiction over digital assets from the SEC and transfer it to varying degrees to the CFTC. The act of shifting jurisdiction from the SEC to the CFTC necessarily means that the SEC’s congressional oversight committees (Senate Banking and House Financial Services) would have to cede oversight authority over the asset class and corresponding federal agencies to the agricultural committees in the Senate and House, which in and of itself presents innumerable political challenges. And because the CFTC is a much smaller agency that has historically not regulated retail markets to the same degree as the SEC, consumer and investor protection advocates almost uniformly oppose any effort to redraw regulatory boundaries. Thus, we are not optimistic that any federal legislation on digital assets will advance any time soon.
NASAA’s letter, which specifically targets the draft Digital Commodities Consumer Protection Act of 2022 but is relevant to most of the currently pending bills, presents a series of public policy arguments against legislation of this type that we believe many members of Congress will find compelling. In brief, the letter lays out several detailed arguments:
- proposed legislation would make it more difficult for state securities regulators to carry out their longstanding efforts to protect investors, promote responsible capital formation, and promote inclusion and innovation in capital markets;
- much of the pending or anticipated federal legislation relating to digital assets would create unnecessary complexities for the well-established securities regulatory framework in the United States, to the general detriment of investors and taxpayers;
- creating new statutory terms or frameworks unique to digital assets but redundant of and possibly contradictory to the well-established securities regulatory framework would have costly consequences for everyone, including investors, legislators, regulated entities, regulators and taxpayers;
- the establishment of new self-regulatory organizations would create conflicts and divert resources away from public regulatory agencies such as state securities regulators, and exacerbate the communication and coordination challenges that regulators and registrants already face;
- efforts to restrict or preempt the authority of state securities regulators would impede their ability to protect investors and promote responsible capital formation; and
- legislation should not attempt to define a category of financial assets either by relying on common knowledge or by citing example products because doing so could have unintended consequences, could elevate terminology over substance, and could unfairly give competitive advantages to certain products or businesses by carving them out of possibly applicable regulatory requirements.
NASAA’s letter also advances a series of arguments regarding why the SEC, both from a resource and experience perspective, is better suited to regulating digital assets than the CFTC. More generally, NASAA’s letter hits both populist and federalist notes, in an effort surely calculated to appeal to a wide congressional audience. Whatever one’s personal views on the issue of digital asset regulation, we believe arguments like those that NASAA has raised in its letter will resonate with enough members of Congress to doom adoption of any of the pending bills in the current Congress. Of course, the upcoming mid-term elections may reorder congressional priorities (and majorities) in the next Congress, which will require a fresh review of the issues. But in the meantime, expect the SEC to continue an aggressive enforcement program in the digital asset space.