US Cryptocurrency Regulation Draft Review: Compliance Costs Increase for Exchanges, Clarity Needed for DeFi Applicability

U.S. lawmakers Kirsten Gillibrand and Cynthia Lummis jointly introduced the "Cryptocurrency Regulation Bill" on the 8th, stating that most digital assets will be treated as commodities and regulated by the CFTC. In this bill, digital assets will be considered "ancillary" unless they exhibit securities characteristics for fundraising from investors; overall, the content is favorable for clarifying and loosening regulations in the cryptocurrency industry.

U.S. senators from both parties, Kirsten Gillibrand and Cynthia Lummis, jointly introduced the "Cryptocurrency Regulation Draft" on the 8th, stating that most digital assets will be treated as commodities and regulated by the CFTC. In this bill, digital assets will be considered "ancillary" unless they have securities characteristics that involve fundraising for investors; overall, the content is favorable for clarifying and loosening regulations in the cryptocurrency industry.

Further Reading: "Bipartisan Push for Cryptocurrency Bill, Industry Professionals Hail a Milestone, Critics from Financial Reform Groups, What Are the Highlights?"

Since it is a draft, there are still areas that need clarification. This article provides a preliminary review and evaluation of the draft by venture capitalist Cinneamhain partner Adam Cochran and OutliersDAO Marketing Director Leo Lee.

• DAOs are required to register as legal entities in the U.S., treasury management DAOs for mining and staking purposes, and DAOs with charitable intentions will not be considered business entities
• DAOs are not disregarded entities as defined by the IRS, meaning they are not subsidiaries or branches of other business entities
• All exchanges and stablecoin providers must register, but the requirements for DeFi protocols are not clear
• Digital assets are mostly treated as commodities and regulated by the CFTC
• Digital assets cannot be considered commodities if they contain any form of debt, stocks, profit sharing, dividends, etc.
• Disclosure requirements may prevent anonymous operational teams from complying
• Any entity that provides a digital asset trading service will be considered a digital asset exchange, potentially including automated market makers
• There is extensive supervision over exchanges, which will significantly increase compliance costs but benefit user protection
• The definition of bankruptcy has changed, allowing users to fully retrieve their assets without being subject to bankruptcy liquidation as seen in: SEC. 407. BANKRUPTCY TREATMENT OF DIGITAL ASSETS
• Fee offsetting rules imply that exchanges will need to pay more for operational and regulatory costs to the government, potentially increasing expenses as seen in: SEC. 24. OFFSETTING THE COSTS OF DIGITAL ASSET REGULATION
• Cochran finds it odd that code updates require user agreement to "terms of use." It should be clarified that updates affecting the overall economy are more practical as seen in: Consumer protection standards for digital assets
• Granting deposit institutions the right to issue stablecoins is a positive development
• There are clear compliance requirements and penalties, although they are higher than expected, at least not enforced through law enforcement actions
• The draft seeks to integrate various state money transmission laws in the U.S., which will bring benefits but also promote information sharing between states and the federal government

Regarding the content of this draft, OutliersDAO Marketing Director Leo Lee commented that digital assets eligible for interest or dividends will be considered securities. However, fees distributed by smart contracts may avoid securities regulations due to their decentralized nature. Therefore, there is still room for discussion on the applicability of these rules to DeFi. He also noted that the draft may compel development teams raising funds in the U.S. to compensate for regulatory restrictions in token design to compete with teams raising funds overseas. Additionally, the draft mentions that DAOs will need to register in the U.S.; however, offshore entities are not specifically addressed in the draft, indicating that these DAOs may still choose to establish companies abroad to hold investment assets and profits rather than registering in the U.S.

In general, Cochran believes that this draft brings clarity to U.S. regulation, but it equates to or even exceeds the regulatory intensity of banking and other financial service providers. There is not much leeway for DeFi, and it does not favor anonymous teams and unregulated DAOs. In the long run, it will benefit the development of cryptocurrencies, but in the short term, it will be painful for most cryptocurrency projects. Nevertheless, this is only the content of a draft, and there will be a lengthy discussion process ahead.