As Capitol Hill advances its work on market structure legislation, the industry has an important moment to ensure any framework reflects its core values and explicitly protects DeFi and open innovation. Just as important is advocating for ideas that have yet to be created, and startups in their earliest stages whose voices might be overlooked.

We’ve developed these proposed principles for market structure legislation to articulate in plain English how DeFi might be defined in legislation. They’re designed to bridge the gap between the crypto community and policymakers, and we’re opening them to community input to strengthen their accuracy and impact.

Your perspective matters – use this form to tell us what works and what we might have missed in our approach.

Summary:

Any market structure legislation that seeks to protect DeFi should:

• Provide a baseline spot commodity regulatory regime that largely excludes the SEC, including having most tokens be treated as digital commodities but letting the SEC keep jurisdiction over tokenized stocks, without giving the CFTC additional power to regulate spot physical commodities.
• Exempt DeFi from all major CeFi regulatory regimes, including by making clear that DeFi protocols will not be required to be registered.

Background:

In policymaking, a term sheet details the core components and objectives of a proposed law to help guide the legislative drafting process. The principles outlined in this document were developed using the 2023 version of the Lummis-Gillibrand Responsible Financial Innovation Act as our analytical foundation. We selected this bill because of its clear division of tokens between securities and commodities. That legislation also established regulatory requirements for centralized crypto exchanges (under both CFTC and SEC regulation), protections for consumers, and coordination between agencies on crypto regulation.

Term Sheet of Principles for Legislation:

1. Crypto assets are native digital assets that are imbued with property rights.
2. Distributed ledger technology means a ledger shared across distributed nodes within a network, synchronized between the nodes, that is publicly accessible, and is appended to via some kind of cryptographic consensus.
3. Smart contracts are computer code deployed to distributed ledger technology that execute instructions based on occurrence or nonoccurrence of conditions.
4. Crypto assets are commodities, except for those that have all the forms and aspects of a security which are also on a decentralized ledger (e.g. Apple stock on a blockchain).
5. A Crypto Asset Exchange is a custodial trading facility that lists at least one crypto asset.
6. A Decentralized Crypto Asset Exchange is
   1. public, permissionless code on a distributed ledger that lets users or groups of users create pools for crypto asset trading that
   2. no person or group of persons can universally control, block, or approve the transactions on the exchange and
   3. is non-custodial in nature
7. CFTC registrants that hold crypto for others should have to follow normal CFTC reporting and recordkeeping requirements.
8. The CFTC should have exclusive jurisdiction over transactions on centralized crypto asset exchanges as well as transactions on decentralized crypto asset exchanges. CFTC does not have the power to issue regulations on spot commodity transactions, however.
9. The CFTC should not have jurisdiction over crypto assets that are securities.
10. The CFTC should not have jurisdiction over NFTs or other non-fungible tokens.
11. CFTC registrants that hold crypto for others should hold their customer assets in a safe manner, including using a separate custodian, segregating funds, and holding customer assets in Treasuries and other financial products allowed by the CFTC.
12. Customers can choose to opt out of these protections.
13. Decentralized crypto asset exchanges should not be asked to register with the CFTC or SEC; DEXs can be used to trade both digital assets commodities and digital asset securities.
14. Any custodial trading facility that offers a market in crypto assets should register as a crypto asset exchange and follow basic core principles, such as recordkeeping; not allowing manipulation; having rules on conflicts of interests; segregating user funds; and having appropriate cybersecurity protections.
15. CFTC civil enforcement penalties should apply to crypto assets under CFTC jurisdiction.
16. The CFTC shall have adequate authority to set regulatory requirements for manipulative trading of crypto assets.
17. Crypto assets should receive the same protections in bankruptcy as cash, commodities, securities, and other property.
18. No national government should be allowed to prohibit trading of crypto assets on DeFi protocols globally.