The Senate Banking Committee introduced a draft bill on Tuesday that would effectively categorize several prominent cryptocurrencies, such as XRP, Solana, Dogecoin, alongside Bitcoin, as commodities instead of securities. This classification follows the existing regulatory framework under which Bitcoin is overseen, placing the newly designated tokens under the jurisdiction of the Commodity Futures Trading Commission (CFTC) rather than the Securities and Exchange Commission (SEC).
The draft legislation defines "non-ancillary assets" as those digital tokens serving as the primary asset in exchange-traded funds (ETFs) listed on national securities exchanges as of January 1 of the current year. According to this criterion, such tokens would no longer be subject to SEC securities regulations, and the associated projects would be relieved from filing disclosures otherwise mandatory for securities.
This designation is notably significant because it effectively grants a regulatory exemption to all altcoin ETFs that were launched prior to the year's start. Tokens such as XRP, SOL, DOGE, Litecoin, Hedera, and Chainlink meet these qualifications since ETFs incorporating these assets have already begun trading on major exchanges.
Traditionally, Bitcoin has been recognized as a commodity similar to gold, and thus regulated by the CFTC as opposed to the SEC. Most altcoins, however, have long existed in regulatory uncertainty with the SEC implying that many could be considered securities requiring registration under the securities laws.
The bill attempts to clarify this confusion by introducing a formal definition for "network tokens." These are digital assets linked directly to blockchain networks that do not confer holders with rights of ownership, profit participation, or voting authority over an issuing company. Should a token meet this definition and additionally demonstrate that it powers a fully decentralized network, it would be classified as a commodity.
Importantly, the bill empowers the SEC to establish standards and measurements to determine the extent of a network’s decentralization. Once a decentralized network threshold is satisfied, any subsequent secondary market trading of such tokens would no longer be subject to securities laws—even if the original token issuance resembled an investment contract.
This clarity has been eagerly awaited by asset managers. Many have submitted applications for ETFs based on altcoins such as XRP and Solana but faced regulatory delays due to uncertainty over whether these tokens were to be treated as commodities or securities.
By linking ETF eligibility to commodity status, the bill provides a clear legal framework making these tokens eligible for commodity treatment. Furthermore, it shields exchanges and market makers from absorbing regulatory risk simply by facilitating transactions involving these tokens. Consequently, purchasing XRP on platforms like Coinbase would not be considered a securities transaction, irrespective of the nature of XRP's original token sales which may have drawn securities scrutiny in the past.
Beyond classification, the draft bill incorporates certain legal safeguards and restrictions. Section 601 offers protections to developers of decentralized finance (DeFi) software protocols. This provision arises from a recent compromise between DeFi participants and traditional financial institutions, addressing concerns from banks that DeFi platforms might circumvent existing financial regulations.
Additionally, the bill prohibits cryptocurrency companies from paying interest on stablecoins. This provision represents a significant win for traditional banking institutions, who have objected to stablecoin issuers such as Tether and Circle offering yield on digital dollar deposits, viewing it as direct competition to bank products.
The Senate Banking Committee is scheduled to markup the bill on Thursday, during which legislators will have the opportunity to suggest amendments before voting. If the draft passes in its present form, it could effectively dismantle the regulatory obstacles currently preventing the approval of altcoin ETFs.
While the passage of the bill does not guarantee immediate approval of all altcoin ETF applications, it would pave a legal pathway for asset managers to resubmit these proposals, particularly those for Solana and XRP ETFs that have previously stalled.
Industry observers like Jordan Jefferson, founder of DogeOS, emphasize that the expected impact of this legislation will primarily be regulatory clarification allowing broader institutional participation, rather than immediate price effects in cryptocurrency markets.
In summary, this draft legislation represents a pivotal development in the regulatory landscape for cryptocurrencies, promising to standardize treatment of significant altcoins as commodities, reduce uncertainty surrounding crypto ETFs, protect DeFi developers, and curtail yield offerings on stablecoins.
Key Points:
- The Senate Banking Committee's draft bill classifies XRP, Solana, Dogecoin, and others as commodities, aligning their regulation with Bitcoin.
- Tokens that serve as the principal assets of ETFs listed before January 1 escape SEC securities regulations under this bill.
- The bill formalizes the definition of “network tokens” and sets standards for decentralization to determine commodity status.
- Protections for DeFi software developers are introduced, alongside a prohibition on stablecoin issuers paying interest to holders.
Risks and Uncertainties:
- The bill must still undergo markup and approval processes in the Senate Banking Committee; amendments could alter its provisions or outcome.
- While it removes regulatory ambiguity for altcoin ETFs, actual approvals by regulators are not guaranteed immediately after passage.
- Restricted stablecoin yield may limit innovation or competitive strategies within the crypto industry.
- The specifics of how the SEC will measure network decentralization and enforce new rules remain to be defined and could impact token classifications.