As part of this heightened regulatory focus in the blockchain space, a new legal bill was proposed by Patrick Henry, the Chairman of the House of Financial Services Committee, and Glenn “GT” Thompson, Chairman of the House Committee on Agriculture. Widely referred to as the “McHenry Bill,” this proposal aims to develop greater clarity regarding legal rules within the digital asset ecosystem.
Today, we are taking a look at the McHenry Bill and the many changes it proposes. Although the chances of this bill passing in its entirety are slim, the bill represents a notable shift in how regulators are approaching digital assets and the blockchain industry as a whole.
Keep reading to find out how the McHenry Bill is poised to significantly impact our industry.
What is the McHenry Bill?
The McHenry Bill is currently still largely in development — the official first proposal was published on June 2nd, 2023, and is called the Digital Asset Market Structure Discussion Draft.
French Hill, the Chairman of the Subcommittee on Digital Assets, Financial Technology, and Inclusion, is quoted in the official press release as stating:
“The discussion draft from the House Financial Services and Agriculture Committees represents a common approach to digital asset regulation that would bring existing consumer and investor protections to digital asset-related activities and intermediaries under the principle of ‘same risk, same regulation.’”
The draft itself is broken into five main sections:
- Title I: Definitions, Rulemaking, and Provisional Registration
- Title II: Digital Asset Exemptions
- Title III: Registration for Digital Asset Intermediates at the SEC
- Title IV: Registration for Digital Asset Intermediaries at the CFTC
- Title V: Innovation and Technology Improvements
Let’s now take a closer look at each of these five sections and what they entail.
Title I: Definitions, Rulemaking, and Provisional Registration
This section of the proposal is all about the standardization of definitions, rulemaking, and provisional registration related to digital assets.
Key changes outlined in this section include:
- Provision of joint rulemakings between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) – including both definitions of key terms in the bill and oversight of dually-registered exchanges.
- Permission to file a provisional registration statement with the CFTC for digital commodity exchanges, digital commodity brokers, and digital commodity dealers.
- Permission to file a provisional registration statement with the SEC for broker-dealers and alternative trading systems (ATS).
This section outlines the significance of getting some form of standardized registration of exchanges, brokers, and dealers – as well as assets.
Title II: Digital Asset Exemptions
The second section of the proposed bill is focused on key digital asset exemptions and rulings that better define the legal boundaries for the purchase, sale, and trade of digital assets.
Important changes in this section include:
- Establishment of an exemption from the securities law for a digital asset issuer’s sale of digital assets if the following conditions are met:
- The total sales of digital assets over the last 12 months is less than $75 million (USD).
- A non-accredited investor’s purchases of digital assets over the last 12 months total less than 5% of either the purchaser’s annual income or their net worth.
- The purchaser does not own more than 10% of the specific digital asset they are purchasing after the sale is complete.
- The transaction does not involve equity or debt securities.
- Digital asset issuers must file information with the Commission
- Digital asset issuers must file annual and semiannual reports until a defined period after a blockchain network has been certified as decentralized.
- Any intermediaries involved in digital asset transactions must be registered with the SEC.
Again, the significance here is lawmaker's recognition that there are size and volume criteria that should be met before any draconian regulation or oversight should be needed (or invested in).
Title III: Registration for Digital Asset Intermediates at the SEC
The third section of the proposal gets into the nitty-gritty of how digital assets will be treated legally by the SEC if the proposal were to pass into law.
These specifics include:
- Exclusion of digital commodities and payment stablecoins from the definition of a security.
- Provision of authority to the SEC over transactions with or involving stablecoins that occur on or with an SEC-registered entity. However, this does not give the SEC authority over the design, structure, or operation of payment stablecoins.
- Prohibits the SEC from excluding trading platforms from exemptions as an alternative trading system (ATS) if the basis for the exclusion is that the assets traded are digital assets.
- Requires the SEC to revise the Customer Protection Rule within 270 days if a registered broker-dealer has gained control of digital assets.
- Requires the SEC to modernize its recordkeeping requirements to include cryptography for distributed ledgers.
- Requires the SEC to complete a study and revise rules under Regulation National Market System, Regulation Systems Compliance and Integrity, and the Market Access Rule.
- Adds digital assets to the lists of covered securities exempt from state blue sky law registration.
- Requires SEC-registered intermediaries offering or seeking to offer at least one digital commodity to register with the CFTC.
Title IV: Registration for Digital Asset Intermediaries at the CFTC
The fourth section achieves the same goal as the third, except with a focus on the CFTC.
Here are the key takeaways from this section:
- Provision to the CFTC of new exclusive regulatory jurisdiction over digital commodity cash or spot markets that occur on or with CFTC.
- Provision of authority to the Commission over transactions with or involving stablecoins that occur on or with a CFTC-registered entity.
- Requires futures commissions merchants to use qualified digital commodity custodians.
- Provision of registration and regulation of digital commodity exchanges (DCEs).
- Sets requirements for custodians to be qualified as digital asset custodians, enabling the holding of digital assets of customers of entities registered with the CFTC.
- Provision of registration and regulation of digital commodity brokers (DCBs) and digital commodity dealers (DCD).
Title V: Innovation and Technology Improvements
The fifth and final section of the proposal deals with all things innovation and technology.
To quickly summarize, the main goals of this section are to establish innovation labs within the SEC and CFTC that focus on strategic codification, modernization, and decentralized finance research. The section also calls for a study to be completed by the Department of Commerce on non-fungible digital assets.
What Does the McHenry Bill Mean for Your Digital Assets?
While Chairman McHenry’s proposal certainly brings new regulatory attention to an industry formerly outside of the peripherals of regulators, the bill has some promising aspects.
In particular, stablecoins are a major area of focus within the bill, signifying a greater level of protection for not only stablecoin products but also for providers of blockchain technologies, wallets, anti-fraud technologies, and disclosure technologies.
Moreover, the bill shows a clear intention to foster rather than oppress innovation. The call for the creation of innovation labs shows an apparent desire by regulators to be more involved and educated in the blockchain space, further helping to prevent scenarios like the aforementioned lawsuits in the future.
Webacy Keeps Your Digital Assets Safe Long-Term
As regulations continue to evolve in the digital asset and blockchain space, finding blockchain-based tools you can rely on for security is a must, especially if self-custody continues to be the safest and clearest way to have full control of your own assets (while complying with government regulations).
At Webacy, we offer several key products that ensure the safety of your digital assets, including:
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