Payments Report: News from Washington, Brought to you by NEACH
VOLUME 2023-7 (SEP 23)
Overview: Over the summer, the House Financial Services Committee and Agriculture Committee each voted to advance a bill that would for the first time create a comprehensive federal regulatory framework for digital assets. The Financial Services Committee also advanced a bill to create rules for payment stablecoins. The bills received bipartisan support in the House committees and their approval marked the first time that digital assets regulatory bills have advanced out of any committee in the House or Senate, signaling that, after many years of anticipation, congressional action to establish rules for cryptocurrency is gaining momentum.
Background
Over the past several years, various members of Congress have drafted and introduced legislation that would create a federal regulatory framework for digital assets. Most notably, Senators Lummis and Gillibrand introduced the Responsible Financial Innovation Act in 2022. That bill would have apportioned regulatory authority for digital assets among the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”). However, the bill did not advance out of committee and, indeed, prior to July 2023 no bill had advanced after introduction.
Committees Advance the Financial Innovation and Technology for the 21st Century Act
On July 26 and July 27, respectively, the House Financial Services Committee (“HFSC”) and Agriculture Committee voted to advance the Financial Innovation and Technology for the 21st Century Act (the “FIT Act”). The FIT Act would give the CFTC primary jurisdiction over digital asset markets, but would also detail a process for allocating oversight of digital assets between the SEC and CFTC.
A digital asset would be regulated by the CFTC if the blockchain network on which it operates is both “functional” and decentralized. A network would be considered functional if the network allows participants to use the digital asset for the transmission and storage of value, participating in services provided on the network, or participating in governance of the network.
The FIT Act also defines and provides for the regulation of digital commodity exchanges, digital commodity brokers, and digital commodity dealers and would require such entities to register with the CFTC. Those entities would be subject to a variety of regulatory requirements focused on customer protections, including requirements relating business conduct, disclosures, segregation of customer funds, minimum capital requirements, reporting, and recordkeeping.
Under the bill, the SEC would regulate “restricted digital assets,” which are defined to include digital assets held by the issuer of the digital asset or related persons before the networks to which the assets relate are functional and decentralized, and digital assets held by persons other than issuers or related persons before the networks to which the assets relate are functional and certified as decentralized.
The FIT Act also defines certain entities that would be required to register with the SEC: digital asset trading systems, digital asset brokers, digital asset dealers. Those entities would also be subject to a variety of regulatory requirements, including capital, recordkeeping, and segregation of customer funds requirements.
Payment stablecoins would be excluded from the definitions of digital commodities subject to CFTC regulation and restricted digital assets subject to SEC regulation. Payment stablecoins would be permitted to trade on both SEC and CFTC regulated platforms, but neither the SEC nor CFTC would be authorized to regulate the operations of payment stablecoins or their issuers.
The FIT Act received bipartisan support in both committees, passing the Financial Services Committee by a vote of 35-15 and the Agriculture Committee by voice vote.
Financial Services Committee Advances Payment Stablecoin Bill
HFSC Chairman Patrick McHenry separately introduced the Clarity for Payment Stablecoins Act of 2023 (the “Payment Stablecoins Act”), which would create a regulatory framework for the issuance and oversight of payment stablecoins. The Financial Services Committee also voted to advance the Payment Stablecoins Act on July 27, 2023, by a vote of 34-16, with 5 Democrats joining the committee’s Republican members.
The Payment Stablecoins Act would define a payment stablecoin as a digital asset designed to be used as a means of payment or settlement that the issuer represents will maintain a stable value. The Payment Stablecoins Act would establish prudential, bank-style regulation and supervision for non-bank payment stablecoin issuers, including reserve and liquidity requirements, application of the anti-money laundering and data privacy laws, and supervision and enforcement authority.
State regulators would maintain primary jurisdiction over non-bank payment stablecoin issuers. However, such entities would also be subject to enforcement action by the Federal Reserve under exigent circumstances, which would be defined by the Federal Reserve through rulemaking. Banks would also be authorized to issue payment stablecoins and would remain subject to supervision by their existing regulator. However, the balance between state and federal oversight remains a point of contention for the legislation; the top Democrat on the HFSC, Rep. Maxine Waters (D-CA), announced her opposition to the bill after long-running negotiations with Chairman McHenry broke down prior to committee markup. Waters has described the bill as “toxic and problematic” and believes it will give a seal of approval to stablecoins issued under state regimes, but “blocks the Federal Reserve from overseeing or enforcing any Federal standards.” The White House is also believed to have similar concerns about the legislation, making enactment of the bill in its current form unlikely.
Outlook: Congress has now taken its most concrete steps yet toward enacting a federal regulatory framework for digital assets, including payment stablecoins. These bills have advanced out of House committees with a modicum of bipartisan support, but not the support of key Democratic congressional leaders or the White House. Nevertheless, the movement on the bills signifies that Congress is more focused than ever on crafting regulation of digital assets and that there is now a basic framework that will be the starting point for negotiation over legislation that could be enacted into law.
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AUTHOR INFORMATION:
Craig Saperstein, a member of Nacha’s Government Relations Advisory Group, is a partner in the Public Policy practice of Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C. In this capacity, he provides legal analysis for clients on legislative and regulatory developments and lobbies congressional and Executive Branch officials on behalf of companies in the payments industry. Deborah Thoren-Peden is a partner and member of the Financial Institutions Team at Pillsbury Winthrop Shaw Pittman LLP. She provides advice to financial institutions, bank and non-bank, and financial services companies. Daniel Wood is a Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. Brian Montgomery is a Senior Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. The information contained in this update does not constitute legal advice and no attorney-client relationship is formed based upon the provision thereof.