Paradigm: The Principles of Cryptocurrency Legislation We Advocate

Author: Paradigm Policy Team

Translation: TechFlow

As Capitol Hill advances its work on market structure legislation, the crypto industry faces a pivotal moment to ensure any framework reflects its core values and clearly protects decentralized finance (DeFi) and open innovation. Equally important is advocating for ideas not yet conceived and for startups in their earliest stages—those most likely to be overlooked.

We have developed these proposed principles for market structure legislation, articulating in clear terms how DeFi should be defined within legislation. These principles aim to bridge the gap between the crypto community and policymakers, and we are opening this document to community feedback to improve its accuracy and impact.

Your input is critical—please use this form to let us know what’s working and what we may have missed.

Summary

Any market structure legislation aiming to protect DeFi should:

• Establish a foundational regulatory framework for spot commodity markets that largely excludes the jurisdiction of the U.S. Securities and Exchange Commission (SEC), treating most tokens as digital commodities while allowing the SEC to continue regulating securitized equities, and without granting the Commodity Futures Trading Commission (CFTC) additional authority to regulate spot physical commodities.

• Explicitly exclude DeFi protocols from any major centralized finance (CeFi) regulatory frameworks, including making clear that DeFi protocols are not required to register with regulators.

Background

In policymaking, a glossary outlines the core components and objectives of proposed legislation to help guide the drafting process. The principles outlined in this document are derived from analysis of the 2023 version of the Lummis-Gillibrand Responsible Financial Innovation Act. We selected this bill because of its clear distinction between tokens classified as securities versus commodities. The bill also established regulatory requirements for centralized crypto exchanges (under dual oversight by the CFTC and SEC), provided consumer protections, and promoted interagency coordination on crypto regulation.

Glossary of Legislative Principles

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

2. Distributed ledger technology refers to a ledger shared among nodes distributed across a network, publicly accessible and synchronized across nodes, with entries added via 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 all the form and characteristics of a security and exist on a decentralized ledger (e.g., Apple stock on a blockchain).

5. A crypto asset exchange is a hosted 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 user groups to create pools for trading crypto assets;

   2. Free from control, blocking, or approval of trades by any individual or group;

   3. Non-custodial in nature.

7. CFTC-registered entities holding crypto assets on behalf of others must comply with standard CFTC reporting and recordkeeping requirements.

8. The CFTC shall have exclusive jurisdiction over centralized crypto asset exchanges and over trading on decentralized crypto asset exchanges. However, the CFTC shall not have authority to issue regulations governing spot commodity transactions.

9. The CFTC shall not have jurisdiction over crypto assets that are securities.

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

11. CFTC-registered entities holding customer crypto assets must hold those assets securely, including through the use of separate custodians, segregation of funds, and investment of customer assets in U.S. Treasury securities and other financial products permitted by the CFTC.

    1. Customers may opt out of these protections.

12. Decentralized crypto asset exchanges (DEXs) should not be required to register with the CFTC or SEC; DEXs may facilitate trading of both digital commodity assets and digital asset securities.

13. Any hosted trading facility offering crypto asset markets must register as a crypto asset exchange and adhere to basic core principles, such as recordkeeping, prohibition of manipulation, conflict-of-interest rules, segregation of user funds, and implementation of appropriate cybersecurity safeguards.

14. Civil enforcement penalties from the CFTC shall apply to crypto assets within its jurisdiction.

15. The CFTC shall have full authority to set regulatory requirements against manipulative trading practices involving crypto assets.

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

17. No national government shall prohibit global access to or use of DeFi protocols for crypto asset trading.