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Legislative Update
Digital Commodities Consumer Protection Act (DCCPA)
There has been a lot of chatter over the DCCPA, a bill proposed in August by Senator Debbie Stabenow (D-MI). If passed, the legislation would authorize the CFTC with exclusive jurisdiction over digital commodity spot markets. The Senate Agriculture Committee postponed a mark up it intended to have on the bill this week, and given the limited number of days that Congress will be in session for the remainder of the year, the earliest the bill could move would be during the lameduck session after the electionWhile it’s generally encouraging to see senators and their staffs eager to help create a workable legislative framework, we think this bill needs work before it potentially becomes law. The lack of clarity around if and/or how this bill affects DeFi is concerning, particularly given the amount of discretion granted to the CFTC. Additionally, the bill does not clearly define what characteristics distinguish a digital commodity from a digital security. Policymaking is an iterative process, and this bill is in its earliest stages. We are confident these details can be worked out.
Stablecoins
According to Politico, House Financial Services Chairwoman Maxine Waters (D-CA) and Rep. Patrick McHenry (R-NC) are still in negotiations over stablecoin legislation. The existing bill would essentially grant stablecoin oversight to the Federal Reserve and, according to last week’s Bloomberg report, restrict the issuance of certain algorithmic stablecoins similar to terraUSD.
Governor Newsom Vetoes Crypto Licensing Regime
What happened?
Last Friday, California’s Governor Gavin Newsom vetoed Assembly Bill 2269, a bill that would have established a licensing regime requiring California firms to register before offering services related to digital assets.
For context, Goveronor Newsom issued an Executive Order back in May to “establish a transparent regulatory environment that both fosters responsible innovation, and protects consumers who use digital asset financial services and products.”
The bill required companies to acquire a license to operate as a digital assets service in California. Furthermore, it restricted all companies from engaging with stablecoins 1:1 backed with dollars.
In his veto, Governor Newsom deemed the bill “premature,” awaiting both research and forthcoming federal action. He added that the bill was “costly,” as it would “require a loan from the general fund in the tens of millions of dollars for the first several years.”
What does this mean?
This is certainly welcome news! The bill’s provisions would have required significant centralization that we think would have made it generally incompatible with permissionless, decentralized assets and networks.
The bill would have effectively ended DeFi in California, making Newsom’s veto a critical act for the ecosystem. By vetoing this bill, and sticking with the spirit and intent of his EO, California will retain its leading status as a crypto innovation hub, for the time being.
Powell Calls for DeFi Regulations
What happened?
On Tuesday, U.S. Federal Reserve Chair, Jerome Powell, participated in the Banque de France’s conference concerning the tokenization of finance and central banks’ role in it.
Chair Powell suggested DeFi’s novelties, such as replacing intermediaries with smart contracts and decentralized infrastructure, present novel risks and regulatory challenges. He also expressed concern for how to approach regulating algorithms as opposed to entities.
While praising the technology for providing efficiency, he added “we’ve got to realize though that in some cases these apparent efficiencies are really superficial in the sense that the cost saving comes from ignoring risks or failing to maintain appropriate levels of assets and liquidity to deal with those risks in good time and bad, and from complying with laws.”
The Chairman went on to say that DeFi has “very significant structural issues around the lack of transparency.”
Concerning stablecoins, the Chairman expressed that their main regulatory concern is their broad adoption beyond crypto platforms and into the general public.
He made clear that “the central bank is and will always be the main source of trust behind money; stablecoins essentially borrow that trust from the underlying issuer” and that a federal role in regulating private money is required.
The Chairman concluded by discussing the prospect of a government issued CBDC, a topic the Fed has been exploring for some time now. He made clear that “cash is not disappearing in the United States,” and the Fed has not decided to proceed nor foresee making that decision for some time. He also said that the Fed will collaborate with Congress and other relevant agencies to evaluate the costs and benefits. Chair Powell later noted that a dollar CBDC, in his opinion, should be intermediated, privacy protected, identity verified, and interoperable.
What does this mean?
The Chairman’s general message about the need for regulation in the industry is congruent with his comments in the past. It’s unclear what the Chairman means when he says there’s a “transparency problem” with DeFi given the nature of public blockchains. This transparency has actually been criticized by some who believe it can leave markets vulnerable to predatory trading practices from people with enough capital to move a market. It’s possible he is referring to protocol development or the pseudonymous nature of transactions.
On net, Powell’s comments were not surprising, although his delineation of the attributes a US CBDC should incorporate may signal that the Fed views itself as being the decider of those issues as opposed to Congress.
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