Interpretation of the "2020 Cryptocurrency Act": New Ideas for the Cryptocurrency Regulation Model

Author: Luo Tao, Chief Compliance Counsel block chain Global Compliance Alliance, Tahota (Beijing) Law Firm, s [email protected]

The rapid development of cryptocurrencies and the lag of supervision have made market chaos inevitable. The uncertainty of the nature and types of cryptocurrencies has hindered the establishment of regulatory rules. With the continuous exploration of regulatory policies in various countries, this problem has been found. New solutions.

On March 9, 2020, US Congressman Paul Gosar (Arizona Republican) secretly submitted the "Cryptocurrency Act of 2020" to the House of Representatives, which divides cryptocurrencies innovatively Targeted supervision of "crypto commodities", "cryptocurrencies", and "crypto securities", and the designation of the Futures Trading Commission (CFTC), Financial Crime Execution Network (FinCEN), and Securities and Exchange Commission (SEC) for them, both This ensures the clarification of electronic digital asset supervision responsibilities, and at the same time provides new ideas for the policy formulation of cryptocurrency supervision in various countries.

Mr. Paul Gosar's legislative assistant Stechschulte said:

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"The bill should not only provide clarity for US crypto assets, but also make it legal."

In fact, this is not the first appearance of the 2020 Cryptocurrency Act. The original version of the bill was leaked in December 2019. Since then, the Gosar team has been making efforts to update and improve the bill, trying to Cryptocurrencies bring “regulatory transparency”. The submitted version has updated some concepts on the original basis.

1. Overview of the "Crypto Currency Act 2020"

1) Divide digital assets into three categories: Cryptocurrencies (Cryto-currency): Blockchain-based "Expression of American Currency or Synthetic Derivatives" Crypto Commodities (Cryto-commodity): Blockchain-based Or a large part of homogenized economic goods or services "Cryto-security:" Debt, Equity and Derivatives "based on blockchain 2) Identify three US regulatory agencies as" major federal digital asset regulation " Institutions ”: Secretary of the Treasury: Acting through the Financial Crime Execution Network (FinCEN) and the Currency Supervision Department (OCC) Futures Trading Commission (CFTC) Securities Trading Commission (SEC)

Picture from SYGNA

3) The above three federal regulatory agencies have been assigned exclusive regulatory power over a certain digital asset:

Financial Crime Execution Network (FinCEN)-Cryptocurrency

Securities and Exchange Commission (SEC)-Encrypted Securities

Futures Trading Commission (CFTC)-Crypto Commodities

4) Other

-The three regulatory agencies are required to keep and publicly disclose the federal licenses, certificates, and registration lists necessary to create virtual assets or exchanges, and keep them updated in real time.

-The bill requires Treasury Secretary Steven Mnuchin to enact regulations through the Financial Crime Enforcement Network (FinCEN) to help track the flow of cryptocurrency transactions.

-Define the concept of "stable currency" in "cryptocurrency" and divide it into reserve-backed stablecoins (supported by 1: 1 of actual assets in bank accounts) and synthetic stablecoins (without reserve support).

-Add the concept of "decentralized oaral", which is a service to transfer or verify external data outside the blockchain to help perform smart contract functions.

Second, the detailed interpretation of the "2020 Cryptocurrency Act"

Part 1: Name

The beginning of the bill determines the name of the bill, "2020 Cryptocurrency Act."

Part 2: Definition of digital assets and regulatory agencies

The bill clearly distinguishes between different types of digital assets, encrypted federal regulators, and stablecoins.

1. What is "encrypted commodity"?

It has complete or a large part of homogenized economic goods or services and derivatives, and the market has nothing to do with the producers of goods or services, and it is based on blockchain or decentralized encrypted ledger.

2. What is "cryptocurrency"?

U.S. currency or synthetic derivatives based on blockchain or decentralized encrypted ledger

Specifically, it includes:

1) The digital assets backed by the reserve are fully mortgaged in the bank account and guaranteed by the actual assets at a 1: 1 ratio.

2) Synthetic derivatives are generated by decentralized oracle or smart contracts and guaranteed by encrypted commodities, other encrypted currencies or encrypted securities.

The definition of "cryptocurrency" now seems to refer to stable assets of the US dollar, such as cable (USDT), Gemini dollar (GUSD), real US dollar (TUSD) and other qualified stable assets.

This provision also classifies stable assets backed by reserves (such as Libra) as cryptocurrencies.

3. What is "encrypted securities"?

All debt, equity and derivatives based on blockchain or distributed encrypted ledgers ".

However, this definition does not include synthetic derivatives that are operated and registered as money service businesses (MSBs) in accordance with the Bank Secrecy Act (BSA) and other federal “AML” / CFT regulatory agencies (such as FinCEN and the Office of Foreign Assets Control).

"Crypto securities" in US law can be roughly defined as a digital asset that has passed the Howey test (created by the Supreme Court in a landmark case in 1946), and if it satisfies "investment in currency", "Promising to profit from investment", "Monetary investment in ordinary enterprises" and "Any profit comes from the efforts of promoters or third parties", then it will be regulated.

4. What is a "distributed ledger"?

-Operates as an independent blockchain, protected by a casting process, and has, for example, a proof of equity to award rewards to users, or a proof of work to award rewards to miners;

-Run as an encrypted asset or smart contract on the above existing independent blockchain;

-It cannot be tampered with and cannot be rewritten without controlling rights;

-The transaction data block must be connected with an encrypted link;

-No need to go through permission, no third-party transactions are required;

-It is an irreversible bearer product;

-Not controlled by any single entity;

-Not issued by the state or private entities.

5. What is "decentralized oracle"?

Refers to a service that sends and verifies real-world data from external sources outside the blockchain, and submits this information to the smart contract located on the blockchain, thereby triggering the execution of the predefined functions of the smart contract.

6. What is a "digital asset"?

The 2020 Cryptocurrency Act divides digital assets (also called virtual assets) into 3 distinct categories:

Encrypted commodities, encrypted currencies and encrypted securities.

7. What is a "receivable institution"?

The draft defines "insured depository institution" in accordance with Article 3 of the Federal Deposit Insurance Law.

8. What is a "stable currency supported by reserves"?

To further define this "cryptocurrency", the bill defines the stable currency supported by reserves as

-Represents a currency issued by the United States or a foreign government-resides on a blockchain or decentralized crypto ledger-1: 1 guarantee with the currency represented-must be deposited in an insured custodian

9. What is a "synthetic stable currency"?

Synthetic stablecoin is defined as a digital asset (a stablecoin that is not backed by reserves) that is stable in value relative to another currency or asset, and exists on a blockchain or decentralized crypto ledger.

10. What is a "smart contract"?

The term "smart contract" refers to a contract that facilitates, executes, or confirms the negotiation or performance of a contract digitally, and is a reliable transaction that does not require a third party.

11. What is a "junior federal digital asset regulatory agency"?

"Major federal digital asset regulator" means:

-(A) Commodity Futures Trading Commission on encrypted commodities;

-(B) The Minister of Finance who took action through the Financial Crime Execution Network (FinCEN), and the currency controller on cryptocurrencies;

-(C) Securities and Exchange Commission (SEC) matters related to encrypted securities.

Part 3: The main areas of digital asset regulation

In its third part, "Establishment of Digital Asset Supervision Areas," the Act assigns supervisory responsibilities as follows:

(a) Encrypted commodities: The Commodity Futures Trading Commission (CFTC) is the only government agency authorized to supervise encrypted commodities.

(b) Cryptocurrencies: The Minister of Finance takes action through the Financial Crimes Enforcement Network, and the Monetary Supervision Department is the main and only government agency authorized to supervise cryptocurrencies (other than synthetic stable currencies).

(c) Crypto securities: The Securities and Exchange Commission (SEC) is the only government agency that has the authority to regulate crypto securities and the synthesis of stable assets.

Part 4: Digital asset exchange registration and publicity

Each federal digital asset regulatory agency shall provide the public with a list of all federal licenses, certificates, or registrations required to create or trade digital assets for the digital assets it supervises, and keep them updated.

Part 5 (New): Provide the public with relevant information about creating or trading digital assets

Each major regulatory agency should list all federal licenses, certificates, or registration information required to create or trade related digital assets.

Part VI: Special requirements related to cryptocurrencies

According to the proposed bill, the Minister of Finance must issue relevant rules through the Financial Crimes Enforcement Network (FinCEN), which involves the following:

-Tracking mechanism of transaction flow; -Provisions support international audits: that is, audit the stablecoins backed by these reserves are 100% stored; -Transformation of stable currencies: if any event occurs (such as over-issue dilution), the stablecoins are forced from the reserve If the type is changed to a synthetic type, or vice versa, the corresponding federal digital asset regulatory agency must be notified.

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It is undeniable that the inclusion of cryptocurrencies in the regulatory framework is a gratifying attempt in itself, whether it is for holders, especially individual holders, or for regulatory agencies, regulating transaction behavior and guiding transaction order It has great advantages in maintaining asset security, which is conducive to the healthy operation of the industry. In the long run, it is inevitable that cryptocurrencies will be included in the regulatory system. How to establish a more efficient regulatory mechanism will be a new topic for future exploration.

It can be seen that the bill adopts the classification of cryptocurrencies and the supervision method of sub-institutions is a new attempt to avoid the regulatory confusion caused by the unclear authority and responsibility of the regulatory agency and the unknown regulatory object under the US regulatory system. Conducive to improving the efficiency and level of supervision. The bill also confirms to some extent that cryptocurrencies are being recognized as an “asset class” by more and more people. At the same time, this “asset class” can still be finely divided so that each class corresponds and is Incorporating into the traditional regulatory framework, that is to say, the regulatory agency specified in the bill has not essentially changed its own regulatory scope, and still continues to perform its duties in the existing regulatory framework. This kind of classification supervision is also reflected in the formulation of regulatory policies in other countries. For example, Switzerland divides tokens into three types: payment tokens, Utility tokens, and Asset tokens. Different regulatory laws apply, and this distinction applies. The form of supervision is similar to that of the 2020 Cryptocurrency Act.

Of course, there is currently no official date to determine whether the bill can be passed by the US Congress, but it is expected that a vote will be held sometime this year, and we can wait and see the results.

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