MA8

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Questions and Answers after reading the bill.

When are digital asset trading systems exempt from registration?

A digital asset trading system that offers or seeks to offer at least one digital asset is not required to register under Section 6(m) of the Securities Exchange Act of 1934 if the trading system satisfies any of the exemptions set forth in Section 240.3b–16(b) of title 17, Code of Federal Regulations. You may want to independently verify whether a digital asset trading system satisfies any of the exemptions in Section 240.3b–16(b).

Under what circumstances can the CFTC exempt a digital commodity exchange from registration?

The bill states that a trading facility offering or seeking to offer a cash or spot market in at least one digital commodity must register with the CFTC as a digital commodity exchange. The CFTC may exempt a trading facility from this registration requirement if the trading facility:

• permits no more than a de minimis amount of trading activity or
• serves only customers in a single State or territory.

The bill also enables the CFTC to exempt a digital commodity exchange from registration if the exchange is subject to comparable, comprehensive supervision and regulation on a consolidated basis by the appropriate governmental authorities in the facility’s home country.

What constitutes customer property for digital commodity exchanges?

According to Section 5i(d)(1)(A)(i) of the Commodity Exchange Act, as amended by the provided source, “customer property” for digital commodity exchanges encompasses all money, assets, and property received by the exchange or accruing to a customer due to trading in digital commodities. The Act emphasizes that these assets belong to the customer. This means customer assets are segregated and should not be treated as belonging to the exchange for any purpose.

Further, Section 5i(d)(3)(A) clarifies that during bankruptcy proceedings, all assets a digital commodity exchange holds for a customer are considered customer property under Section 761 of Title 11, United States Code. This includes any funds received for trading, custody, or for margining, guaranteeing, or securing contracts for the sale of a digital commodity.

However, Section 5i(d)(5)(A) allows customers to waive these restrictions by explicitly informing the exchange in writing. This waiver permits the exchange to use the customer’s digital commodities for “blockchain services.”

The bill also defines “blockchain service” in Section 5i(d)(5)(D) as any activity related to validating transactions on a blockchain system, providing security for a blockchain system, or any other similar action required for a blockchain system’s continuous operation.

Additionally, Section 5i(d)(4)(A) prohibits exchanges from misusing customer property. “Use” in this context encompasses utilizing a digital asset unit to participate in blockchain services or decentralized governance systems linked to the digital commodity without the customer’s express direction.

What entities must register as a digital commodity exchange?

Any trading facility that offers, or seeks to offer, a cash or spot market in at least one digital commodity must register with the Commission as a digital commodity exchange. This requirement does not apply if the trading facility:

• Permits no more than a de minimis amount of trading activity, or
• Serves only customers in a single State or territory.

This information is from Section 404 (titled “REGISTRATION OF DIGITAL COMMODITY EXCHANGES”) of the provided text, specifically section 5i(a). The definition of “digital commodity” and “Commission” can be found in other sections of the legislation.

The Act aims to establish a clear regulatory framework for digital assets, specifically focusing on the distinction between securities and commodities within the cryptocurrency market. The bill details the definitions of “digital commodities” and related entities like “digital commodity exchanges.” It underscores the role of the Commodity Futures Trading Commission (CFTC) in overseeing this new regulatory space. Furthermore, the bill highlights the collaborative efforts required between the CFTC and the Securities and Exchange Commission (SEC) to develop comprehensive rules and guidance for the trading and custody of digital assets. This joint effort aims to mitigate risks while fostering innovation and investor protection in this evolving financial landscape.