Senate Republicans just released a set of principles to guide the development of digital asset market structure legislation, establishing their goals of clearly defining their legal status and allocating regulatory jurisdiction among US agencies, among other things.

It is their latest initiative to regulate the cryptocurrency space following the recent passage of stablecoin legislation, and the SEC’s and White House’s gatherings of industry participants intent on helping to guide such regulatory drafting.

The Senate Banking Committee Crypto Market Structure Principles they outlined this week included these elements:

• Legislation should clearly define the legal status of digital assets, distinguishing digital asset securities from digital asset commodities in statute.
• Jurisdiction should be clearly allocated among regulators in statute, “preventing an all-encompassing regulator from emerging.” And the legislation should acknowledge that not all distributed ledger technology should be regulated equally, the committee said. Along those lines, the committee members stressed that the legislation should recognize that there are different risks and benefits between centralized firms, decentralized finance protocols, and non-custodial software platforms, and “self-custody of digital assets should be explicitly preserved.”
• Distributed ledger technology and smart contracts for other, nonfinancial purposes, such as those that manage health data, should not be regulated like financial products.
• Regulation should be modernized to foster innovation, such as by providing an SEC exemption for certain digital asset fundraising. And these laws “should not apply principles designed for centralized firms to decentralized protocols.” As such, tokenization should not be seen as a fundamental change to the nature of the underlying asset and more of an evolution of financial infrastructure that enhances transparency and liquidity.
• Regulation should protect centralized digital asset intermediaries, granting them registration and risk-management requirements similar to other centralized intermediaries today.
• Illicit finance measures should be crafted – but be targeted and pro-innovation, requiring the adoption of examination standards and clarifying that the Bank Secrecy Act and International Emergency Economic Powers Act extend to entities abroad that have US touchpoints.
• Federal financial regulators should provide clear guidance affirming that many crypto-related activities are permissible for banks and other financial institutions, provided they do not threaten the safety and soundness of the institution. Some commonsense ways to foster such innovation include no-action guidance, sandboxes, safe harbors, coordination, and appropriate application requirements, the committee stated.

Senator statements, Coinbase’s VP of Legal

In their statements accompanying their press release, Senate Banking Committee Chairman Tim Scott, (R-SC), said in a statement that the principles will act as a baseline for negotiations on the bill, and Senator Bill Hagerty, (R-TN), said the market structure framework should be reasonable and “light-touch.”

Former CFTC Chairman Rostin Behnam said in his own prepared remarks that public interest in digital assets will not wane, and that regulatory inaction “will only result in greater risk to our financial markets and investors, through lack of market transparency, fraud, market manipulation, corruption and conflicts of interest.”

His conclusions was that: “In short, our current trajectory is not sustainable.”

And he said the creation of a self-regulatory organization along the lines of FINRA is warranted.

Speaking on behalf of the industry, in prepared remarks before the subcommittee, Coinbase’s vice president of legal, Ryan VanGrack, said the Commodity Futures Trading Commission should regulate the derivatives and spot markets for assets such as bitcoin, ether and other non-security tokens and the SEC should regulate tokenized securities.

VanGrack also stressed the need for regulations that distinguish between the primary issuance of digital assets – often as part of fundraising efforts – and secondary transactions in which users trade assets without any contractual ties to the original issuer. He warned that enforcement that blurs that distinction creates confusion and uncertainty across the market.

“No amount of litigation or regulation can replace the clarity and direction that thoughtful, bipartisan legislation can provide,” VanGrack said.