Home Commodities NFTs As Commodities: Proposed Senate Bill Signals Regulatory Guidelines – Commodities/Derivatives/Stock Exchanges

NFTs As Commodities: Proposed Senate Bill Signals Regulatory Guidelines – Commodities/Derivatives/Stock Exchanges

7
0


To print this article, all you need is to be registered or login on Mondaq.com.

In the rapidly moving world of digital assets, specifically
non-fungible tokens (NFTs),
we begin to gain some clarity on their future. Creators and
regulators alike have speculated about when and how NFTs will be
regulated. A bill proposed in the U.S. Senate provides some insight
into how the federal government may seek to regulate NFTs and other
digital assets and vehicles.

The Responsible Financial Innovation Act

Guardrails are proposed to be placed around the growing industry
of digital assets. The Responsible Financial Innovation Act,
spearheaded by Senators Kristen Gillibrand and Cynthia Lummis,
proposes that the vast majority of digital assets (including NFTs)
be classified as commodities (such as wheat, oil or steel) rather
than as securities. Oversight responsibility would be on the
shoulders of the Commodity Futures Trading Commission (CFTC), not
the Securities and Exchange Commission (SEC).

A few months back the SEC stated, “NFTs can be deemed
securities if they pass the so-called ‘Howey Test,’ a
regulatory standard used to determine if the transaction has
an 
investment contract
.” Even with the stage set for NFTs to
be treated as commodities, the SEC may still view fractional NFTs
(f-NFTs) within its purview based on the view that they can be used
to raise money in the manner of a traditional security (packaging
f-NFTs allows an issuer to sell pieces of the NFT).

The CFTC was created to regulate commodity futures and option
markets. Its mission is to protect market participants and the
public from fraud and abuse, as well as systemic risk associated
with derivatives subject to the 
Commodities Exchange Act
 (CEA). The allocation of
responsibility to the CTFC comes as a surprise to some and may
alter the way in which businesses breaking into the emerging space
of digital assets plan to conduct business.

The bill is a first proposal to structure the markets for
digital assets with long-awaited legal definitions. The proposal
creates a complete regulatory framework for digital assets,
encouraging responsible financial innovation, flexibility,
transparency, and robust consumer protections while integrating
digital assets into existing law.

The bill defines digital assets as a “natively electronic
asset that confers economic or proprietary access rights or powers
and includes virtual currency and payment stablecoins.” It
explicitly states cryptocurrencies and other digital coins will not
be treated like traditional securities under SEC scrutiny unless
they entitle the holder to the privileges enjoyed by corporate
investors such as dividends, liquidation rights, or a financial
interest in the issuer.

NFTs as Commodities

A commodity includes all goods and articles, services, rights,
and interests which are the subject of a contract for future
delivery or provision. Generally, the key terms of a futures
contract include an agreement (1) to purchase or sell a commodity
for delivery in the future, (2) at a price that is determined at
the time of the agreement, (3) with fulfillment effected by
physical delivery, (4) which is liquidated before the delivery date
and, (5) which must be traded or exchanged by persons and firms
registered with the 
CFTC
.

This raises the question of what “physical delivery”
means in the context of an NFT; and may create different
implications whether there is an additional asset connected to the
NFT or if it is in reference to the NFT itself. NFTs could
ultimately be a forward, future, or swap even if the represented
asset is not. A forward contract enables parties to buy or sell an
asset at a specified price on a future date and is typically used
for hedging. A futures contract is similar, where it is an
agreement to buy or sell a certain commodity at a pre-determined
price in the future and positions are settled daily. Lastly, a swap
contract is where parties agree to exchanging variable performance
for a fixed market rate.

If an NFT is considered a commodity, the CEA could apply in one
of two ways. First, the CEA’s general prohibitions on
deceptive and manipulative trading may apply to NFT dealings
effected as fully funded, unleveraged transactions (where there is
no debt involved). This creates greater protections for NFT
transactions because of the duties of inquiry, diligence, and
disclosure imposed on sellers. If the NFT is offered on a margined
or leveraged basis (where the seller can trade positions larger
than the amount in their trading account), additional requirements
would apply, such as the requirement to trade the NFT solely on a
registered derivatives exchange unless the transaction meets the
exception that “physical delivery” is made within 28
days of the date of the transaction.

Conclusion

The digital asset industry is continually evolving, and the
stated goal of Congress is to create legislation that promotes
innovation while simultaneously protecting consumers against fraud,
misinformation, and resulting market volatility. The CFTC (which
will regulate NFTs) oversees the purchase and sale of raw
commodities. The bill requires all digital asset issuers to (1)
maintain high-quality liquid assets valued at 100% of the face
value of all outstanding payment, (2) publicly disclose relevant
information about the assets backing the stablecoin and their
value, and (3) have the financial backing to redeem all outstanding
stablecoin payments at par.

The ramifications of the bill are extensive. Its size and
complexity could necessitate lawmakers to pass its components in
pieces over time. Regardless, the bill shines some much needed
clarity on how Congress has been discussing the regulation of
commodities and enables businesses and issuers interested in
offering to prepare for coming regulation and oversight.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Finance and Banking from United States

Loan Market Update

Cadwalader, Wickersham & Taft LLP

Lots of news out of the loan market. SOFR remains a focus, we have new forms from the LSTA, and what has been deemed an “existential threat” to the syndicated loan market has reared its head once

CFPB Takes Adverse Action Against Machine Learning

McGlinchey Stafford

In 2020, the CFPB blogged that Regulation B’s flexibility can be compatible with AI algorithms, because “although a creditor must provide the specific reasons for an adverse action…

Source link

Previous articleGoldman Sachs-Backed Rental Fund Accumulates Over 1,300 Single-Family Rentals In Markets With Highest Rent Growth
Next articleRoundup: Rising prices of basic commodities threaten to disrupt schooling in Zimbabwe

LEAVE A REPLY

Please enter your comment!
Please enter your name here