DIGITAL ASSET
POLICY PROPOSAL
Safeguarding America’s Financial Leadership

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Executive
Summary

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Executive
Summary

Digital assets like Bitcoin, Ether, stablecoins, and othercryptocurrencies are now a mainstream part of the financial
market ecosystem. In 2013, the market cap for the entire
cryptocurrency market was around $1.5 billion. In 2021, thatmarket cap has grown to $2 trillion. Adoption rates have seen asimilarly astounding rate of growth with an estimated 1 million
crypto users in 2013 to an estimated 330 million users worldwide
today,1 with tens of millions in the United States alone.
But as with the early days of the internet, the use cases forcrypto are still in a nascent stage of development and adoption,
but the emergent use cases are societally powerful. Blockchain
and distributed ledger technologies have accelerated thedemocratization of finance that began with the emergence ofmoney payments using mobile technologies. Using cryptography
to break down component concepts of traditional finance, andturning those concepts into secure, transparent protocols,
financial services that are out of reach can be unlocked withfurther development and adoption. Whether factors such aslack of wealth, inaccessible infrastructure, or a range of societal
factors have historically contributed to the 1.7 billion adults who
remain unbanked today, the evolution of decentralized protocols
and peer-to-peer marketplaces aim to resolve that disparity.
Marketplaces for digital assets have emerged to offer a platformthat facilitates the demand from Americans to access certain
innovations in the way financial assets are transferred andtraded. Retail and institutional traders have direct accessto platforms that execute transactions 24 hours a day, sevendays a week. Transactions settle in real time. A multitude ofintermediaries is no longer needed as the digital asset market
infrastructure has developed so that exchange and trading
services, clearing, settlement, and custody can be provided
effectively and more efficiently by the same entity.

Digital Asset Policy Proposal3

We are seeing the beginning of more efficient, transparent,
and cost-effective processes compared to those in traditional
financial markets. These developments, in turn, will empower
market participants with greater and more direct control overtheir trading decisions, increasing accessibility to financial
services, reducing excess costs of the current system —costs too often borne by retail customers, and creating moretransparency for regulators, who are already benefiting from new
ways to engage in market surveillance and combat illicit finance.2
These changes are contributing to one of the most dynamic
and broad based periods of American financial innovation.
Crypto, including advances in distributed ledger technology anduse of smart contracts, are being built and discussed acrossthe country — at our universities, on social media, and in thehomes of entrepreneurs. The result is greater transparency,
decentralization, and ultimately, democratization of financial
markets.
Laws drafted in the 1930s to facilitate effective oversight ofour financial markets could not contemplate this technologicalrevolution. At that time, in a paper-based financial system,
multiple physical steps were necessary to move a financial
asset from one person to another. The lack of an automatic,
efficient, and trusted infrastructure that verified and transferredassets led to the need of separate intermediaries, such as
brokers, custodians, exchanges, market makers, and settlement
and clearing agencies, often with conflicting interests andincentives. The only way to create trust in the system wasto require and then regulate these intermediaries. Ensuing
regulations treated each step as a distinct service with manyrequiring an intermediary, thereby enshrining their role in theseprocesses as being required under law. Elements of thoselaws do not have room for the transformational potential that
digital assets and crypto innovation make possible. They do notaccommodate the efficiency, seamlessness, and transparencyof digital asset markets, and thus risk serving as an unintended
barrier to current innovations in the digital asset economy.
Forcing the full spectrum of digital assets into supervisory
categories codified before the use of computers risks stifling thedevelopment of this transformational technology, thus pushingoffshore the innovative center of gravity that currently sits in the
United States. Doing this will have profoundly harmful economic

Digital Asset Policy Proposal

4implications and undermine the United States’ leadership at atime when technology is so critical to this country’s geopoliticalstrengths.
Fostering this innovation is also critical because there are
too many people in our society who do not see a place forthemselves in our current financial system. According to theFederal Reserve, up to 22% of American households could be
unbanked or underbanked.3 This could mean up to 55 million
adult Americans don’t have access to key functions of our criticalfinancial and societal architecture. Furthermore, even thosewith a bank account and recognizing the dramatic advances infinancial technologies, payments remain slow and cumbersome.
Millions continue to pay too much and wait too long to transfer
funds to loved ones overseas or to invest their money directly inprojects and ideas they care about.
This exclusion of millions from the financial system is occurring
as more and more Americans look for alternatives to traditional
finance. According to the University of Chicago, surveys showthat a diverse group of Americans are availing of the unique andempowering financial opportunities that crypto affords.4 Thisuse case is more diverse and more inclusive than almost all otherasset classes. Naturally, they see the opportunities of digitalassets and the financial agency and empowerment they provide.
To help the public and the businesses that will provide theservices for this new, thriving financial ecosystem, regulatory
certainty for everyone is required.

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Approach to a New
Framework

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Approach to a New
Framework

Regulatory Pillars

It is time for a clear and comprehensive approach to regulating
digital assets, and for regulation that is fit for purpose.
Underpinning this new regulatory framework must be arecognition of the benefits of how technological innovations
can better empower and protect the public. This requires
establishing new laws and oversight structures for digital asset
trading and disclosure — which draw upon some of the lessonsof existing regulation — to enable more efficient practices,
promote customer protection, and build and maintain stability
and confidence in our financial system.

Regulate Digital Assets
Under a Separate
Framework
Designate One Regulator
for Digital Asset Markets
Protect and Empower
Holders of Digital Assets
Promote Interoperability
and Fair Competition

The United States is behind other major jurisdictions, including
the European Union, the United Kingdom, Singapore, andother key jurisdictions in developing a unified approach to thetreatment of digital assets. Absent taking similar steps, theUnited States is at risk of becoming a “taker” of regulation as
opposed to the primary “shaper” of modern financial services —a position the United States has long occupied.
It is in this context that we at Coinbase have undertaken aneffort to contribute to the emerging consensus — a consensus
that recognizes that policymakers need to act to ensure that theAmerican people can access the full benefits of this innovation.
There have been a number of important proposals alreadyoffered, and a great deal of helpful thought and commentary.
We have reviewed these ideas carefully and listened to manythoughtful policymakers and ecosystem participants. Our
conclusion has been that we are at an important inflection pointin this technological revolution. We can best contribute to thepolicy debate by offering our thoughts on a framework for a reimagined regulatory system that is truly technology neutral andopen to innovation.
From our work, we feel that there are four important pillars that

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should inform the debate on what a new regulatory framework
should consist of. Our hope is that these pillars will help shapethe debate, highlight key elements to accomplish important
objectives, and accommodate innovation for the benefit ofAmerican society. These pillars would address confusion over thedefinition and regulatory treatment of digital assets, preserve
the benefits of end-to-end services within a single entity, andpromote low cost, efficient, and safe access to digital assets for
consumers.

Regulatory Pillars
Pillar One:
Regulate Digital Assets Under a Separate Framework

The cryptoeconomy is defined by two concurrent innovations,both of which have manifold impacts on our financial system:
1. The blockchain-driven and decentralized evolution of theinternet
2. The emergence of a distinctive asset class that is digitally
native and empowers unique economic use cases
The changes made possible by these two innovations aretransformational, but do not easily fit within the existing
financial system, which assumes that the structure of our
financial markets will remain largely as they have been in thepast. Our financial regulatory system is predicated on theongoing existence of a series of separate financial market
intermediaries — exchanges, transfer agents, clearing houses,
custodians, and traditional brokers — because it nevercontemplated that distributed ledger and blockchain technology
could exist. A new framework for how we regulate digitalassets will ensure that innovation can occur in ways that are
not hampered by the difficulty of transitioning from our legacy
market structure.

Pillar Two:
Designate One Regulator for Digital Asset Markets

To avoid fragmented and inconsistent regulatory oversight ofthese unique and concurrent innovations, responsibility overdigital assets markets should be assigned to a single federal
regulator. Its authority would include a new registration processestablished for marketplaces for digital assets (MDAs) andappropriate disclosures to inform purchasers of digital assets.

Digital Asset Policy Proposal8Additionally, in the tradition of other markets, a dedicatedself-regulatory organization (SRO) should be established tostrengthen the oversight regime and provide more granular
oversight of MDAs. Together, they should formulate new rulesthat permit the full range of digital asset services within asingle entity: digital asset trading, transfer, custody, clearing,
settlement, money payment, staking, borrowing and lending, andrelated incidental services. This two-tier regulatory structure
will ensure efficient and streamlined regulation and oversight,
and evolve elements of the existing frameworks to meet therequirements of our new technologically-driven financial system.

Pillar Three:Protect and Empower Holders of Digital Assets

This new framework should have three goals to ensure holders ofdigital assets are empowered and protected:
1. Enhance transparency through appropriate disclosure
requirements,
2. Protect against fraud and market manipulation, and
3. Promote efficiency and strengthen market resiliency.
Each of the goals should be accomplished in recognition of theunique characteristics and risks of the underlying functionalities
of digital assets.

Pillar Four:
Promote Interoperability and Fair Competition

Innovation in decentralized protocol development and the peerto-peer marketplace continues to produce novel approaches
that allow greater financial access across all facets ofsociety. To realize the full potential of digital assets, MDAs
must be interoperable with products and services acrossthe cryptoeconomy. If fully realized, this can enshrine faircompetition, responsible innovation, and promote a thriving
consumer and developer ecosystem.

Digital Asset Policy Proposal

91Regulate Digital Assets
Under a Separate Framework

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Regulate Digital Assets
Under a Separate Framework

Unintended complexities ofapplying existing federal laws
to digital assets: an example

Today there is no comprehensive regulatory framework fordigital assets. Regulators have instead applied existing statutory
authority and regulations to these assets, in a piecemeal fashion.
This dynamic exists because there is no overarching consensus
about how the United States should promote — or even allow —innovation in our financial architecture.

Securities laws implemented
in the 1930s were designed
primarily to provide investors
with information about theissuers of securities so thatinvestors could weigh therisks of their investments.
As a result, securities laws
focus on disclosure about thecompany, its management,
and its financial results.
However, the decentralized
and open-source nature ofblockchain-based digital assets
makes it a poor fit for thecurrent regulatory structure.
Digital assets often function
on decentralized protocols
with many contributors, withno central organization or“company,” and with no financial
results to report on to theholders of the digital assets.
Every holder of a digital asset
can examine for themselves thefunctionality and governancestructure of the asset. Applying
the disclosure requirements ofpublic companies would likely
mislead the public about whatis actually material information
about a digital asset.
Exacerbating these problems isthat it is unclear where digitalassets may fall under existing
securities laws. The regulatory
treatment of digital assets as
securities currently depends oninterpretations of legal tests
developed long before digitalassets existed. This includes thelong standing Howey test from1946 where the Supreme Court
reviewed whether citrus groves
were an “investment contract,”

A challenge faced by regulators is that digital assets havecharacteristics that can make them different from traditional
financial instruments in both their operation and the way weinteract with them. As a result, regulators have not been able todefine and classify many digital assets based on their existing
statutory frameworks. Neither the public nor market participants
can be certain of how any particular regulator might decide toregulate a digital asset in any given situation, or whom to go tofor answers about its potential treatment.
Depending on its features and circumstances of use, a digitalasset may be viewed as a payment instrument, with services
supervised through state-issued money transfer licenses,5specialized state regimes (like the NYDFS Bitlicense6), andsubject to the CFPB’s enforcement authority.7 It may be acommodity subject to the antifraud enforcement authority of
the CFTC8 or a security subject to regulation by the SEC.9 Or
perhaps some combination of all of the above and all at the sametime. This list of possible regulators is far from exhaustive. Somestates have developed specialized bank charters that permit
digital asset custody and transaction services,10 and the OCC has
granted limited purpose bank charters to several digital asset
custodians.11 But none of these regulatory frameworks address
all the activities and permutations of digital assets, and not eventhe regulators are certain of where their authority starts or ends.
Moreover, digital asset markets operate differently from

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11and therefore a security.
While the Howey test has animportant role in defining
what is a security, applying
it to digital assets has evenled the SEC to be unclear andinconsistent.
The purpose of the Howey test
was to determine whether an
instrument was a security and,
therefore, subject to regulation.
Digital assets should be subject
to a clear and predictable
regulatory framework,
rather than subject to theunpredictable application of the
Howey test as a substitute.
Even if a digital asset is asecurity, it cannot today belisted or traded on securities
exchanges and it cannot beheld or transferred throughtraditional broker-dealers.
Therefore, were a digital asset
to succeed in meeting the
rigorous, but often inapplicable,
registration requirements fora securities public offering,as a practical matter, it still
could not be traded like othersecurities. No one could
have intended this untenableoutcome.
Alternatives to a Unified
Framework For Digital Assets
Others have made important
contributions to clarify thislegal morass. For example, theDigital Asset Market Structure
and Investor Protection Act13
attempts to do this by defining
a digital asset security as adigital asset that gives theholder the specific rights toequity or debt in an issuer; toprofits, interest, or dividend
payments from the issuer; inthe major corporate actions of
the issuer; and to liquidationrights in the event of issuer
liquidation. Other types ofdigital assets would not be
regulated as securities.
The Digital Commodity
Exchange Act14 would address
the confusion on what is asecurity by broadly defining
a new “digital commodity,”
bringing a range of tokens into
the scope of regulation by the
CFTC. A “digital commodity”

traditional financial markets. The convergence of thedecentralized evolution of the internet with the emergenceof digitally-native assets has created digital assets whose
underlying technology mitigates risks inherent to thosetraditional markets. For example, controllable electronic
records like blockchains reduce the need for intermediaries. This
removes many of the conduct issues that plague the traditional
markets today because customers do not have direct accessto products and services. It may also engender new risks thatcurrent laws never contemplated.
The result is a fragmented and incomplete regulatory frameworkthat was never crafted to contemplate the risks and benefits ofdigital asset technology. Market participants, the public, andeven regulators are left confused. For example, uncertainty
over whether a digital asset may also be a security is stifling
innovation and development of digital asset marketplaces. The
lack of clear statutory authority and an absence of regulations tooversee this new industry, combined with the inconsistent threatof enforcement actions, leaves market participants vulnerable tosanctions and discipline as reward for good faith effort to bringnew products to market that benefit the public.
Legislation is needed to create an effective and coherent
regulatory framework for digital assets. The first important andnecessary step is to create a statutory definition of a digitalasset — one that can be used to define the scope of the new
regulatory framework. A digital asset subject to the framework
should be defined to mean:
A financial asset issued and transferred using distributed ledger
or blockchain technology. “Financial asset” would include anasset whose primary use is as a payment instrument, medium
of exchange, means of storing value, or otherwise as a financial
interest.12
In creating a new regulatory framework for digital assets,
Congress should recognize in law that all digital assets,
including digitally native versions of traditional financial assets,should be subject to a new regulatory regime for digital assets.
This would ensure that regulation relevant to the underlying
technology is consistent across all digital assets. For example,
regulations governing the trading, clearing, and settlementof digital assets should apply to all digital assets, ensuring
they reflect the more efficient methods of value transfer andDigital Asset Policy Proposal12

is defined as any form offungible intangible personal
property that can be exclusively
possessed and transferredperson to person without
necessary reliance on anintermediary. It would exclude
a digital asset that does not
represent a financial interestin a company, partnership,or investment vehicle, which
would be treated as securities
under existing law.

exchange that blockchains make possible.
In creating the new regulatory regime, the framework shouldincorporate the principles and best practices from regulations
that govern traditional financial assets where the characteristics
of particular digital assets merit doing so.

While we recognize the meritsof these approaches, we believe
the most durable solution would
be to establish a new unified
regulatory framework for all
digital assets and associatedactivities. The attendant
regulations, registrations, anddisclosures are tailored to thecharacteristics, risks, and typesof activity involved, without theencumbrances of reconcilinglegacy market structures to the
new technology and asset class.

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Designate One Regulator forMarketplaces of Digital Assets

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Designate One Regulator forMarketplaces of Digital Assets

Alternatives to a single
supervisor approach

Fragmentation and overlap in the regulation, and supervision,of financial markets have created inefficient and inconsistentoversight of digital asset marketplaces and their activities.
The combination of a registration path for these marketplaces,a single federal regulator, and a complementary SRO are allnecessary components to the solution.

Establishing one federal
regulator for all digital asset
marketplaces would itself be
an important innovation in
financial services regulation.
Generally, regulation offinancial activities by the U.S.
government is divided among
a multitude of regulators,
including the SEC, CFTC,
Federal Reserve, OCC, FDIC, and
CFPB based upon a wide variety
of factors, from the type ofentity involved to the products
or services provided. Similarly,
states have played an importantpart in financial services
regulation, and state regulatorsserve as primary regulators forbanks, money transmitters, andnon-bank lenders. Some states
have adopted digital asset
specific regulatory frameworks
such as the specialized
Wyoming SPDI bank charter or
the NYDFS Bitlicense.
Policymakers may seek to follow
a more traditional approach,as has been contemplated
by other proposals for digitalassets. For example, theDigital Asset Market Structure
and Investor Protection Act
contemplates joint rulemaking
between the SEC and CFTC
to classify digital assets
securities separate from digitalassets and assign supervisory
responsibility between the SEC
and CFTC based upon theseclassifications.

Marketplaces today perform the full lifecycle of digital asset
transactions within a single entity. They are designed toseamlessly host and directly serve tens of millions of people,
and access does not depend on broker-dealer gatekeepers as
is required by securities exchanges. Recordkeeping is native
to blockchain transactions and settlement for digital assets
takes place in minutes, compared to two days for equity
securities. This eliminates the need to manage settlement risk
by separating central counterparties from depositories, transfer
agents, and custody services.
The efficiency gains from straight-through-processing — byhousing all digital asset activities under a regulated MDA — canalso serve to reduce risks in the system. Quicker settlement
reduces reliance on capital and margin to facilitate trading andcan avoid suspension of customer access to markets. While theoutdated and costly role of the broker-dealer as gatekeeper iseliminated, these types of traditional intermediaries can stillengage in critical market-making activities that provide valuableliquidity benefits to all participants.
Ensuring consistent regulation and application of the laws
requires a single regulator. Where new policy questions orchallenges arise, the ability of a single dedicated regulatory
body to respond in an efficient and timely manner benefits
everyone: the public, the government, the marketplaces, and theholders. For the government in particular, oversight by a single

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regulator would improve supervisory efficiencies, streamline
policy implementation and enforcement processes, andgenerally avoid wasting taxpayer resources.
To support market integrity, the framework should establish
a new digital asset SRO to provide further oversight of MDAs.
SROs are an important and historic part of the regulatory fabricof U.S. financial markets and already provide critical support
for federal regulators in the securities and derivatives markets.
The digital asset SRO would have delegated authority under the
statute to provide interpretive guidance to members on a rangeof MDA regulatory and supervisory matters.
The framework would preempt state-by-state registration andrelated regulatory requirements. This would include preemptionof state money transmitter regulations, consistent with current
exemptions for federally regulated entities such as brokerdealers, futures commission merchants, and banks. This would
bring uniformity to the implementation of rules and lower thecompliance and examination burdens of MDA supervision.
The treatment of platforms and services that do not custodyor otherwise control the assets of a customer would need to
be inherently different from an MDA that holds and controls
customer assets, and is therefore not addressed by thisframework.

2.1
MDA regulation should support
the efficiency benefits ofstraight-through-processing
and authorize MDAs to performthe full range of digital asset
transactions, including digitalasset trading, transfer (e.g.,wallet services), custody,
clearing, money payment,
staking, borrowing and lending,and related incidental services.

Full lifecycle of digital asset services with MDA
registration

Today’s innovations in digital asset markets improve theexperience and welfare of participants. MDAs provide directaccess to end-to-end services and straight-through-processing
for digital asset transactions. These marketplaces currently
perform custody, trading services, settlement, and clearing
under the same roof, and are capable of offering staking as well
as borrowing and lending services involving digital assets. The
defining feature that differentiates MDAs from other market
participants is that they provide custody and trading services
on behalf of their customer. Direct access gives participants
greater control over where and how they buy, sell, use, and holddigital assets relative to traditional markets. The result is anecosystem that has the promise of increased efficiency, greatertransparency, and ultimately a better experience for customers.

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To support the benefits from straight-through-processing
innovations in market structure and services, an MDA should bepermitted to provide its customers full digital asset lifecycle
services and related activities, including:• Trading of all digital assets.
• Services directly to retail and institutional customers.
Customers should not be required to access MDAs throughintermediaries (as is generally true for securities andderivatives exchanges).
• Where appropriate, margin trading and other prime
brokerage-type services such as lending and borrowing,
subject to the oversight and regulations of a new selfregulatory organization that will address the risks associatedwith these activities.
• Custody of customer assets in a segregated manner andsubject to blockchain audit procedures regularly used by
MDAs that would satisfy examination requirements.
• Post-trade settlement services, including netting and the
movement of client ownership of digital assets on and off
blockchain.
• Money transmission of digital assets and fiat currencies,
including transfers of fiat and digital assets among usersof an MDA as well as transfers away from the MDA to otherintermediaries or to self-hosted wallets.
An MDA that facilitates trading in digital assets should be
subject to regulations specific to those activities. The regulator
should also be authorized to offer different registration paths
for different kinds of MDAs depending on the scope of activities
they provide. Regulations should focus on equal and open
access to digital asset trading for all market participants —retail and institutional.

2.2

Create a New Self-Regulatory Organization

Self regulatory organizations are a well-established featureof U.S. financial markets. SROs have created effective publicprivate partnerships leading to better supervision of market
participants and their activities.15 The nimbleness, knowledge,
and resources of SRO members are critical attributes in ensuring
the fairness and efficiency of industry practices. Incorporating
an SRO into the regulatory supervision of MDAs will speed thedevelopment and enforcement of an appropriately-tailored
digital asset industry rulebook. In doing so, the SRO would shiftsome of the burdens and costs of regulating MDAs to industry

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participants and away from taxpayer funded agencies.
All registered MDAs should be required to be members of the
SRO. The SRO would provide granular oversight for the full rangeof MDA activities, lead regulatory and compliance examinationsof MDAs, and impose fines and other sanctions. The new SRO
would be accountable to, and under the supervision of, thedesignated single federal market regulator for MDAs.
The SRO should establish the self-certification process thatan MDA would use to make a digital asset available for tradingon its platform. This process, similar to the futures markets,provides an efficient way for new digital assets to be offeredsubject to meeting regulatory standards. The SRO would also
have authority to provide interpretive guidance to its members
regarding the application of its rules.
The SRO approach for digital assets should not mirror theapproach found in the securities and derivatives markets, wheremultiple SROs across exchanges, clearing agencies and others
often face coordination challenges and competing incentives intheir supervisory responsibilities. These problems are avoided
by having a single SRO, under the supervision of a single federal
regulator, dedicated to developing the more granular rules forthe industry, rules that would likely go beyond the authority of afederal regulator.16

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3

Protect and Empower
Holders of Digital Assets

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Protect and Empower
Holders of Digital Assets

The immense potential of digital asset technology provides
the opportunity to democratize the financial system throughgreater direct participation by all Americans. To instill consumer
confidence and provide robust customer protection, theregulatory framework must (1) enhance transparency throughappropriate disclosure requirements, (2) address fraud andmarket manipulation, and (3) promote efficiency and resiliency.
Each goal should be implemented with recognition of the uniquecharacteristics and risks of the underlying functionalities ofdigital assets.

3.1
Appropriate information
environment for digital assets
Digital assets that are
well-established, broadly
understood, and decentralized,
like Bitcoin and Ether, should
not require ongoing disclosure.
The material information
about their features and risks
are transparent to the public.
With no central management
team, there is no information
asymmetry that could be
addressed by additional
disclosure.
Digital tokens that are earlier
in the life cycle, and not yet
decentralized, should have aminimum set of disclosures.
For example, those could bebased on key features of thewhite papers that are alreadywidely used by the industry. The
Clarity for Digital Tokens Act,17
which is based on the token
safe harbor proposal advanced
by SEC Commissioner Hester
Peirce,18 is an example of what

Enhanced Transparency

A high quality and transparent information environment for
digital assets will empower customers to make well-informed
decisions about the transactions in which they enter. A robust
disclosure regime tailored to the specific characteristics, risks,and benefits of different digital assets is necessary.
For digital assets that are debt or equity securities, many of thecurrent securities disclosure requirements may be appropriate.
In contrast, for digital assets that are well established anddecentralized, like Bitcoin and Ether, there is no information
asymmetry with the market that needs to be resolved, and no
ongoing disclosure required.
Different disclosures are more appropriate for other types ofdigital assets, particularly those that represent a use caseor rights relating to a single project or endeavor. Their values
do not depend on an issuer or the business of an issuer, suchas the mix of unrelated projects or the types of complicatedownership structures that commonly define public companies.
The operational and governance aspects of digital assets arealso fundamentally different. For example, self-executing smart

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such disclosure could look like.
It focuses on features such as
information about significant
holders of the tokens, numberof tokens, governanceprovisions, information about
the underlying technology, themethod of distribution, andfunctionality of the underlying
network and tokens.
Asset-backed tokens, likestablecoins and other digitalassets that are pegged to aparticular value or fiat currency
and maintain a reserve ofassets designed to ensure
they maintain the peg, requirea different type of disclosure.
The reserves are often held in
high-quality, short-term assets
to avoid run risks. They canresemble the composition of a
traditional money market fund— cash and cash equivalents— but are designed as stablevalue payment instruments, notinvestments. The disclosures
should be appropriate to how
they are being used, which isinherently different from money
market funds.

contracts of digital asset protocols are open and available forall to see. The risks related to computer operated protocols
are entirely different from those related to human discretionover projects. Disclosure requirements for these digital assets
should focus on material aspects of the digital asset rather
than simply importing legacy requirements that are not helpful
to market participants or the public. Notably, importing legacy
requirements that are not tailored for the digital asset may
actually harm holders by misdirecting them from the risks of theunderlying protocol.
The information environment for digital assets should focus
on the material characteristics and risks of the asset itself. An
asset-centric approach would include information about thefeatures of underlying projects that investors are likely to findmost relevant in their purchase or use decisions. This includes,for example, the type of blockchain on which digital assets arerecorded and transferred, as well as their technological andeconomic properties. Other information features should include
the level of decentralization, whether capital is being raised aspart of the distribution, operational and governance rules, andfunctionality and characteristics of the underlying network andtokens.
Importantly, disclosure requirements must be flexible, so they
can be readily applied to a wide range of digital assets and sothey are resilient in the face of future innovation. The assigned
federal regulator — together with the new SRO — must also takea flexible and nimble approach with the disclosure requirements
rules that the information environment applied in practice. This
includes offering frequent interpretive guidance that will allow
for market participants to reasonably and easily determine
the requirements that will apply. Where additional guidance isneeded, there should be a straightforward process for obtaining
timely, case-specific, interpretive, or exemptive relief.

3.2

Address Fraud and Market Manipulation

There is currently no federal, consumer protection-focused
regulatory regime for all digital assets that protects against
market abuses. Enhanced transparency and preventing market
abuse are the foundation of a vibrant, efficient, and resilient
market that promotes public trust and confidence.
The digital asset regulator and SRO should develop requirements

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for MDA trading facilities for digital assets. As with securities
and derivatives markets, the new SRO would monitor andperform cross-market surveillance across regulated MDAs toprovide integrity and public confidence in market participant
adherence to the new regulatory structure.
An MDA would need to make available required disclosures about
the digital assets it supports. It should establish requirements
and mechanisms for executing transactions on MDA platforms,
including for order book matching. The MDA should have theability to monitor trading activity on its platforms and to enforce
its trading requirements. MDAs should provide clear information
about their operations to the public.
These requirements should incorporate key principles andbest practices from existing registration categories, such aswith Alternative Trading Systems (ATSs) for securities, SEFs
for swaps, and futures exchanges for futures contracts, whilereflecting the unique characteristics of digital assets.

3.3

Promote Efficiency and Strengthen Market Resiliency
MDAs that provide end-to-end financial services offer asignificant potential for increased efficiency. This includes
facilitating real-time transactions with straight-throughprocessing and ease of user interactions through a single
platform.

Regulations for MDAs should preserve this efficiency while
promoting the resiliency of MDAs and customer protection. Rules
for MDAs should account for market participants having directaccess to exchange services, and not through broker-dealers as
gatekeepers. This approach stands in contrast to the exchange
membership model that requires intermediated access to
trading, which is standard in securities and derivatives markets.
The regulations should prescribe baseline requirements aroundcyber and operational integrity and resiliency. They should
include requirements for post-trade transparency of material
terms of digital asset transactions conducted on the platform.
Rules should include requirements for asset safekeeping anduse, to address financial stability by requiring MDAs to maintainadequate capital and liquidity, to facilitate customer portability,
to promote interoperability, and provide clear disclosures
regarding the services provided and associated fees. MDAs

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22

should be required to mitigate and disclose potential conflicts ofinterest.
MDAs must also consider and address risks arising from therole played by market-makers and other liquidity providers on
their trading venues. MDAs would be required to implement
a compliance program, including coverage of BSA AML
requirements. Appropriately tailored customer identification,transaction monitoring, SAR filing requirements, and OFAC andsanctions screening obligations should all remain as available
resources.

Digital Asset Policy Proposal

23

4

Promote Interoperability
and Fair Competitio n

ES

I

1

2

3

4

4

Promote Interoperability
and Fair Competition

To ensure the continued development of new and innovative
digital asset products and services, government’s role ineffectively overseeing the financial system, and United States’
leadership in financial innovation, the digital asset regulatory
framework should affirmatively promote interoperability acrossthe crypto ecosystem, as it exists today and in the future.
The crypto ecosystem offers an unprecedented opportunity fordevelopers to build products and services that contribute to thelives of Americans. Preserving and enhancing interoperability
would allow the continued development of decentralized
protocols, including solutions that allow free and open exchange
of information between networks rather than closed andpermissioned walled gardens. Interoperability also permits
wider and more seamless peer-to-peer marketplace access forholders of digital assets, reducing transactional inefficiencies,
and advancing the democratization of financial systems. It
would also nurture emerging innovations in a growing number offinancial services, such as remittances, small loans, insurance,savings accounts and new protocols that provide even morefinancial empowerment.
Interoperability becomes more important as the crypto
ecosystem continues to develop use cases in the non-financial
sector, where consumers seek new ways to access and use theirdigital property across the digital economy. Healthcare, realestate, and management of intellectual property, to name a
few use cases, are experiencing a transformation through theapplication of blockchain technology.
To support the continued development of new innovations the
new regulatory framework should encourage communication,competition and cross-pollination among protocols,
applications, and MDAs. Adhering to this principle avoids the

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25

risk of the regulation unintentionally picking winners and losers
and actively works against the entrenchment of current market
participants.
Benefits from promoting interoperability and fair competition
include:• Giving people greater choice in how to interact with theirdigital assets. For example, interoperability can facilitate
users’ ability to easily transfer digital assets across different
platforms and tools, allowing them to explore new andinnovative use cases and experiences in the emerging
decentralized financial ecosystem. Incumbent financial
market intermediaries often make this difficult, imposing
manual and inefficient processes that charge customers fees
for the simple act of moving their own property.
• Permitting digital asset holders to stake their assets throughan MDA or by directly interacting with digital asset protocols.
Staking serves as a primary means of establishing a securefoundation for crypto technology. Participants should beallowed to choose and move among MDAs and alternative
methods and platforms for staking activities, and balance theperceived tradeoffs between the two.
• Allowing holders of digital assets to choose among MDAs andself-custodied wallets. This provides for easier access, use,
and transfer of digital assets and digital property in new andinnovative ways.
• Providing fair access to decentralized protocol services.
These services can compete with MDAs to provide simple,
secure and convenient financial transactions and user
experiences, with reduced costs. These benefits areenhanced by compatibility with centralized digital asset
platforms and traditional banking services, and thewillingness of market participants to share information andexchange data.
This list is undoubtedly incomplete because current innovations
and their underlying elements are still in development. The
potential future is not yet widely understood. Maintaining
technology neutrality in the regulatory framework is critical toensure that we support the development of emerging digitalassets and services. This will help ensure a competitive andvibrant digital asset market that secures continued American
financial leadership.

Digital Asset Policy Proposal

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Notes1

https://www.yahoo.com/now/countries-using-cryptocurrency-most-210011742.html

2
An Analysis of Bitcoin’s Use in Illicit Finance; Michael Morell, Josh Kirshner and Thomas Schoenberger(Apr. 6, 2021).
3
Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S.
Households in 2018 - May 2019, available at https://www.federalreserve.gov/publications/2019-economicwell-being-of-us-households-in-2018-banking-and-credit.htm.

Associated Press-NORC Center for Public Affairs Research at the University of Chicago, More Than One
in Ten Americans Surveyed Invest in Cryptocurrencies, July 22, 2021, available at https://www.norc.org/
NewsEventsPublications/PressReleases/Pages/more-than-one-in-ten-americans-surveyed-invest-incryptocurrencies.aspx.

4

See Congressional Research Service, Telegraphs, Steamships, and Virtual Currency: An Analysis of Money
Transmitter Regulation (Aug. 20, 2020) available at https://sgp.fas.org/crs/misc/R46486.pdf

5

6

23 NYCRR Part 200.

The CFPB has asserted the ability to bring actions against cryptocurrency firms under its Unfair,
Deceptive, or Abusive Acts or Practices (UDAAP) authority. Dodd-Frank Act, Title X, Subtitle C, Sec. 1036;
PL 111-203 (July 21, 2010).
7

The Commodity Exchange Act provides the Commodity Futures Trading Commission with anti-fraud
enforcement authority over spot market transactions in commodities, which the agency has viewed asincluding many types of digital assets. Section 6(c)(1) of the Commodity Exchange Act, 7 U.S.C. §9. Thisauthority does not extend to regulation and supervision of these markets. For a summary of this topic,
see CFTC Commissioner Stump, Digital Assets: Clarifying CFTC Regulatory Authority & the Fallacy of theQuestion, “Is it a Commodity or a Security?,” (Aug. 23, 2021, available at https://www.cftc.gov/PressRoom/
SpeechesTestimony/stumpstatement082321.

8

Framework for “Investment Contract” Analysis of Digital Assets, U.S. Securities and Exchange Commission.
https://www.sec.gov/files/dlt-framework.pdf; see also Securities and Exchange Commission v. Ripple Labs,
complaint, U.S. District Court for the Southern District of New York, 20 Civ. 10832 (December 22, 2020).
https://www.sec.gov/litigation/complaints/2020/comp-pr2020-338.pdf.

9E.g.,Wyoming Division of Banking, Special Purpose Depository Institutions, https://wyomingbankingdivision.wyo.gov/banks-and-trust-companies/special-purpose-depository-institutions.

1011E.g., OCC Begins Accepting National Bank Charter Applications From Financial Technology Companies,
Office of the Comptroller of the Currency, July 31, 2018. https://www.occ.gov/news-issuances/newsreleases/2018/nr-occ-2018-74.htm.
12This definition excludes non-financial tokenized assets, for example, representations of physical assets
such as non-financial commodities, blockchain-based records of trade financing documents, and title toreal estate, art and other collectibles. This definition also excludes Non-Fungible Tokens (NFTs) that are
non-financial assets. These non-financial tokenized assets would not be subject to regulation under the
new digital asset framework, just as they are not subject to any market regulator’s jurisdiction today. Thisapproach is consistent with industry comments to the Basel Committee consultation focused on a new
regulatory framework for the treatment of crypto-asset exposures within the global banking system.
13
Digital Asset Market Structure and Investor Protection Act, available at https://beyer.house.gov/
UploadedFiles/BEYER_028_xml.pdf.

Digital Commodity Exchange Act of 2020, available at https://republicans-agriculture.house.gov/
uploadedfiles/final_-_digitalcea_xml.pdf?utm_campaign=2604-396.

14

17 CFR 240, Release No. 34-50700, “Concept Release Concerning Self-Regulation,” U.S. Securities andExchange Commission, March 8, 2005. https://www.sec.gov/rules/concept/34-50700.htm#II. (“A key reason[for SROs] was that the cost of effectively regulating the inner-workings of the securities industry at thefederal level was viewed as cost prohibitive and inefficient. In addition, the complexity of securities trading
practices made it desirable for SRO regulatory staff to be intimately involved with SRO rulemaking andenforcement. Moreover, the SROs could set standards that exceeded those imposed by the Commission,
such as just and equitable principles of trade and detailed proscriptive business conduct standards.”)

15

See 17 CFR 240, Release No. 34-50700, “Concept Release Concerning Self-Regulation” (“Moreover, theSROs could set standards that exceeded those imposed by the Commission, such as just and equitableprinciples of trade and detailed proscriptive business conduct standards.); see also Senate Document No.
93-13 (page 2), Securities Industry Study (page 2) (“The concept of industry self-regulation, subject to SEC
oversight, is well-adapted to dealing with problems of conduct and ethics . . . “).

1617Clarity for Digital Tokens Act of 2021, available at https://republicans-financialservices.house.gov/
uploadedfiles/tsh_xml_signed.pdf.

Commissioner Hester M. Peirce, Public Statement, Token Safe Harbor Proposal 2.0 (April 13, 2021).
https://www.sec.gov/news/public-statement/peirce-statement-token-safe-harbor-proposal-2.0.

18

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#FinancialFuture