Any market structure legislation aimed at protecting DeFi should provide a foundational regulatory framework for spot commodities, largely excluding the jurisdiction of the SEC.

Author: Paradigm Policy Team

Translation: Deep Tide TechFlow

As the U.S. Congress advances its work on market structure legislation, the crypto industry faces a pivotal moment to ensure that any framework reflects its core values and explicitly protects decentralized finance (DeFi) and open innovation. Equally important is to give voice to ideas that have yet to be born and to startups in their early stages that may be overlooked.

We have developed these principles for market structure legislation, articulating in clear language how to define DeFi within the legislation. These principles aim to bridge the gap between the crypto community and policymakers, and we are also opening up for community feedback to enhance their accuracy and impact.

Your input is crucial—please use this form to let us know what works well and what we may have missed.

Summary

Any market structure legislation aimed at protecting DeFi should:

• Provide a foundational regulatory framework for spot commodities, largely excluding the jurisdiction of the U.S. Securities and Exchange Commission (SEC), including treating most tokens as digital commodities, while allowing the SEC to continue regulating securities-like stocks, without granting the Commodity Futures Trading Commission (CFTC) additional authority to regulate spot physical commodities.

• Clearly exclude DeFi protocols from any major centralized finance (CeFi) regulatory framework, including explicitly stating that DeFi protocols do not need to register.

Background

In policymaking, the glossary details the core components and objectives of the proposed legislation to help guide the legislative drafting process. The principles presented in this document are based on an analysis of the 2023 version of the Lummis-Gillibrand Responsible Financial Innovation Act. We chose this bill because of its clear delineation of tokens between securities and commodities. The bill also establishes regulatory requirements for centralized crypto exchanges (under dual regulation by the CFTC and SEC), provides consumer protections, and promotes inter-agency coordination on crypto regulation.

Legislative Principles Glossary

1. Crypto assets are native digital assets with property rights attributes.

2. Distributed ledger technology refers to a ledger shared among nodes distributed across a network, synchronized for public access among nodes, and appended through some form of cryptographic consensus.

3. Smart contracts are computer code deployed on distributed ledger technology that can execute instructions based on the occurrence or non-occurrence of conditions.

4. Crypto assets are commodities unless they possess the form and characteristics of all securities while existing 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 (DEX) is:

   1. Public, permissionless code deployed on a distributed ledger that allows users or groups of users to create crypto asset trading pools;

   2. No individual or group can fully control, block, or approve trades on the exchange;

   3. Non-custodial in nature.

7. CFTC-registered entities holding others' crypto assets should comply with normal CFTC reporting and record-keeping requirements.

8. The CFTC should have exclusive jurisdiction over trading on centralized crypto asset exchanges and decentralized crypto asset exchanges. However, the CFTC should not have the authority to issue regulatory rules for spot commodity trading.

9. The CFTC should not have jurisdiction over securities-like crypto assets.

10. The CFTC should not have jurisdiction over NFTs or other non-fungible tokens.

11. CFTC-registered entities holding others' crypto assets should securely hold client assets, including using separate custodians, fund segregation, and investing client assets in government bonds and other CFTC-allowed financial products.

    1. Clients may opt out of these protections.

12. Decentralized crypto asset exchanges should not be required to register with the CFTC or SEC; DEXs can be used to trade digital asset commodities and digital asset securities.

13. Any custodial trading facility providing a crypto asset market should register as a crypto asset exchange and comply with basic core principles, such as record-keeping, prohibiting manipulation, establishing conflict of interest rules, segregating user funds, and having appropriate cybersecurity protections.

14. CFTC civil enforcement penalties should apply to crypto assets within its jurisdiction.

15. The CFTC should have sufficient authority to set regulatory requirements for manipulative trading of crypto assets.

16. Crypto assets in bankruptcy should receive the same protections as cash, commodities, securities, and other property.

17. No national government should prohibit global trading of crypto assets through DeFi protocols.

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