House Republicans propose bill to provide crypto oversight and enforce SEC regulation.

Crypto exchanges would have a way to register with the U.S. Securities and Exchange Commission (SEC) and trade digital securities, commodities, and stablecoins, all in one location, under a proposal from the Republican leaders of two House of Representatives committees. The proposed legislation, the most significant crypto oversight proposal Congress has come up with this year, would meet many of the digital assets sector’s demands. However, the draft bill released by the House Financial Services Commission and Agriculture Committee leaders has not yet received Democratic support and comes with caveats, including the SEC’s ongoing authority to decide which assets are securities that would remain under its jurisdiction.

The “discussion draft” states that any regulated crypto firm that handles a token or cryptocurrency can argue that the assets are commodities, but they must explain in detail how they operate and demonstrate that they are genuinely decentralized by certifying that no one is directing the project or controls more than 20% of the assets. The SEC can challenge that claim if it can provide a “detailed analysis” showing that the asset should fall under its jurisdiction.

For some crypto platforms, however, the categorization of each asset could become less important because an SEC-registered crypto exchange – labeled as an alternative trading system (ATS) – would be able to establish trading in stablecoins and commodities as well. So, those platforms would potentially handle all of a crypto investor’s transactions in one place, as long as they also register with the U.S. Commodity Futures Trading Commission (CFTC).

The draft bill would establish a new category of registered business for the CFTC: a digital commodity exchange where certified crypto commodities would trade. The new exchanges would have to comply with the agency’s standard protections, including full segregation of customers’ assets, and ensure that they are not vulnerable to market manipulation. The agency would also have new authority over direct trading of crypto commodities, which was also a feature of other bills considered by Congress last year.

As U.S. oversight currently stands, both the SEC and CFTC have been waging an enforcement battle against crypto companies, including some of the largest trading platforms, and any crypto-related rule efforts at the SEC have moved toward dramatically restricting crypto ties to the traditional financial system. While SEC Chair Gary Gensler insists that the existing securities laws are sufficient, the legislation would force him to modernize the regulations for crypto-specific oversight.

This bill, a product of negotiations between Rep. Patrick McHenry (R-N.C.), the chair of the financial panel, and Rep. Glenn “GT” Thompson (R-Pa.), the chair of the agriculture committee, does not yet represent the necessary input from their Democratic counterparts. It is a “discussion draft” intended to start the conversation, according to a senior policy staff member familiar with the legislation, who said the chairs hope Democrats will create their version, and the two sides can begin to find common ground.

Furthermore, the legislation includes several other key features, such as a certification process for token projects seeking to be treated as commodities with the CFTC, detailed disclosures about their operations, and the ability for broker-dealers to take custody of crypto assets. The House Republicans are also calling for studies of decentralized finance (DeFi) and non-fungible tokens (NFTs), which suggests that regulation of those parts of the crypto economy may be pushed further down the road.

At this stage, the legislation does not include any appropriations, meaning the SEC and CFTC are not given a new heap of cash for the significant increase in work or the major boost in staff probably needed at the commodities agency. The people who worked on the bill said they decided it would be better to leave the money discussion to the regular congressional budget process. Finally, even if the House finds a compromise and passes a bill, it still requires approval in the Senate, where a crypto-critical Brown has remained tight-lipped about his legislative plans.

The bill has now become a part of a larger negotiation, not only with House Democrats and the Senate, but also with regards to how it fits into the other major congressional crypto effort this year: the House Financial Services Committee’s two competing drafts of stablecoin bills, one from each party. Lawmakers from both sides have stated that dealing with the oversight of stablecoins – which are typically dollar-pegged tokens that U.S. regulators have warned could pose wider financial stability concerns – could be Congress’s first major accomplishment in the crypto space.

Read More: Do these companies have an SEC-friendly path for crypto by registering?

Edited by Nick Baker.