[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[S. 3087 Introduced in Senate (IS)]
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118th CONGRESS
1st Session
S. 3087
To impose requirements on digital exchanges, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
October 19, 2023
Mr. Tillis (for himself and Mr. Hickenlooper) introduced the following
bill; which was read twice and referred to the Committee on Banking,
Housing, and Urban Affairs
_______________________________________________________________________
A BILL
To impose requirements on digital exchanges, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Proving Reserves Of Others' Funds
Act'' or the ``PROOF Act''.
SEC. 2. DEFINITIONS.
In this Act:
(1) Covered asset.--
(A) In general.--The term ``covered asset'' means,
with respect to a customer of a digital exchange,
money, an asset, or property of the customer.
(B) Exceptions.--
(i) Proprietary funds.--The term ``covered
asset'' does not include proprietary funds of a
digital exchange.
(ii) Margin accounts.--If a customer of a
digital exchange has opened a margin account
for the purposes of borrowing cash or digital
assets, or other related activity, the assets
in that margin account are not covered assets.
(2) Digital asset.--The term ``digital asset'' means any
digital representation of value that is recorded on a
cryptographically secured digital ledger.
(3) Digital commodity.--The term ``digital commodity''
means any form of fungible and intangible personal property
that--
(A) can be--
(i) exclusively possessed; and
(ii) transferred from a person to another
person without necessary reliance on an
intermediary; and
(B) is not an investment contract.
(4) Digital custodian.--
(A) In general.--The term ``digital custodian''
means an entity that holds, maintains, or safeguards
digital commodities, digital assets, and other assets
on behalf of a customer.
(B) Exception.--Any entity facilitating clearing or
settling services of a covered asset on behalf of a
customer shall not be considered to be a digital
custodian of that covered asset for the duration of the
clearing or settling process.
(5) Digital exchange.--The term ``digital exchange'' means
a trading facility that lists for trading not less than 1
digital commodity or digital asset.
(6) Digital wallet.--The term ``digital wallet'' means any
device, physical medium, program, or service that stores a
digital asset or digital commodity.
(7) Investment contract.--
(A) In general.--The term ``investment contract''
means a contract--
(i) that provides for an investment of
money in an enterprise with a sponsor; and
(ii) the objective of the performance of
which is primarily profit (rather than
consumption), which is derived primarily from
the managerial or entrepreneurial efforts of
the sponsor described in clause (i).
(B) Use of certain terms.--For the purposes of
subparagraph (A)--
(i) the term ``money'' means--
(I) any medium of exchange
recognized as legal tender anywhere in
the world; or
(II) any convertible virtual
currency, as defined by the Financial
Crimes Enforcement Network of the
Department of the Treasury; and
(ii) the term ``sponsor'' means a manager
or entrepreneur that has solicited investment
in a contract described in that subparagraph.
(C) Effect of membership in certain
organizations.--A member of a formal or informal
decentralized autonomous organization is not, solely by
reason of that membership, or through participation in
such an organization, the holder of an investment
contract.
(D) Exclusions.--A contract that would otherwise be
an investment contract under this paragraph is not an
investment contract if the obligee of that contract--
(i) as of the date on which the contract
became effective, primarily expected profit
from performance of the contract; and
(ii)(I) at a date after the date described
in clause (i)--
(aa) primarily expects to consume
goods or services associated with the
contract; or
(bb) no longer expects profit
primarily from the managerial or
entrepreneurial efforts of the sponsor
described in subparagraph (A)(i) with
respect to the contract.
(8) Office.--The term ``Office'' means the Office of
Domestic Finance of the Department of the Treasury.
(9) Under secretary.--The term ``Under Secretary'' means
the Under Secretary of the Treasury for Domestic Finance.
SEC. 3. REQUIREMENTS FOR DIGITAL EXCHANGES REGARDING TREATMENT OF
CUSTOMER ASSETS.
(a) Required Standards and Procedures.--Each digital exchange shall
establish baseline accounting standards and procedures that are
designed to protect and ensure the safety of covered assets of
customers of the exchange.
(b) Holding of Customer Assets.--
(1) In general.--Each digital exchange shall hold the
covered assets of each customer of the exchange in a manner
that minimizes--
(A) the risk of loss by the customer of any such
covered asset; and
(B) any delay in the customer accessing any such
covered asset.
(2) Segregation of funds.--
(A) In general.--Each digital exchange shall treat
and deal with all covered assets of a customer of the
exchange that are received by the exchange as belonging
to the customer.
(B) Co-mingling prohibited.--Except as provided in
subparagraph (C), with respect to any covered asset of
a customer of a digital exchange, the exchange may
not--
(i) co-mingle that covered asset with
assets that are not covered assets; or
(ii) use that covered asset to margin,
secure, or guarantee any trade or account of
any person other than the customer for which
that item is held.
(C) Exceptions.--
(i) In general.--A digital exchange may,
for convenience, co-mingle and deposit a
covered asset of a customer of the exchange in
the same account as funds of the exchange with
any bank, trust company, or qualified digital
custodian.
(ii) Withdrawal.--A digital exchange may
withdraw from a bank, trust, or digital wallet
account such share of a covered asset of a
customer of the exchange as may be necessary in
the ordinary course of business to margin,
guarantee, secure, transfer, adjust, or settle
a transaction regarding a digital asset or
digital commodity with another digital
exchange, including for the payment of a
commission, a brokerage fee, interest, taxes,
storage costs, or any other charge that
lawfully accrues in connection with a digital
commodity transaction.
(iii) Substitution.--A customer may
explicitly consent to a digital exchange
substituting covered assets of the customer
with certain other assets.
(c) Enforcement.--
(1) In general.--If, in the process of reviewing a report
submitted to the Under Secretary under section 4(b) with
respect to a digital exchange, the Under Secretary discovers
that the digital exchange has violated a provision of this
section, the Under Secretary, through the Office, shall impose
a civil penalty on the digital exchange in the manner described
in clauses (i), (ii), and (iii) of section 4(c)(1)(A) (subject
to paragraph (2) of this subsection).
(2) Rule of construction.--For the purposes of a civil
penalty imposed under paragraph (1)--
(A) an entity that is subject to the requirements
of section 4(a), as described in section 4(c)(1)(A),
shall be deemed to be an entity that is subject to the
requirements of this section; and
(B) the failure of an entity to satisfy the
requirements of section 4(a), as described in section
4(c)(1)(A), shall be deemed to be a failure to satisfy
the requirements of this section.
SEC. 4. ATTESTATION REQUIREMENTS.
(a) Attestation.--
(1) In general.--Not later than 30 days after the effective
date of this section, and monthly thereafter, each digital
exchange and each digital custodian shall obtain from an
independent auditing firm an attestation that the applicable
entity has proof of reserves, which shall be accompanied by
appropriate evidence demonstrating proof of those reserves, as
described further in subsection (b).
(2) Inability to obtain services of auditing firm.--
(A) In general.--A digital exchange or digital
custodian may contract with, or otherwise obtain the
services of, a disinterested third party to carry out
the responsibilities of an independent auditing firm
under paragraph (1) only if the digital exchange or
digital custodian is unable to contract with, or
otherwise obtain the services of, an independent
auditing firm to carry out those responsibilities.
(B) Applicability.--If a digital exchange or
digital custodian contracts with, or otherwise obtains
the services of, a disinterested third party as
described in subparagraph (A), that third party shall
be subject to the requirements of this section to the
same extent as an independent auditing firm carrying
out the responsibilities described in paragraph (1).
(3) Industry standard.--
(A) Solicitation of standard.--Not later than 90
days after the date of enactment of this Act, the
Public Company Accounting Oversight Board and the
American Institute of Certified Public Accountants
shall jointly issue a request for public comment
soliciting proposals from the digital asset industry
regarding a standard for the attestations required
under this section.
(B) Establishment of advisory committee.--After the
expiration of the 90-day period described in
subparagraph (A), the Public Company Accounting
Oversight Board and the American Institute of Certified
Public Accountants shall establish an advisory
committee that shall be comprised of the entities that
submit proposals under that subparagraph.
(C) Creation of standard.--The advisory committee
established under subparagraph (B) shall--
(i) create a proposed standard for the
purposes described in subparagraph (A); and
(ii) submit to the Public Company
Accounting Oversight Board and the American
Institute of Certified Public Accountants the
proposed standard described in clause (i) for
approval of the proposed standard by those
entities.
(D) Approval of standard.--
(i) In general.--Not later than 18 months
after the date of enactment of this Act, the
Public Company Accounting Oversight Board and
the American Institute of Certified Public
Accountants shall jointly approve a proposed
standard submitted to those entities under
subparagraph (C).
(ii) Extension of deadline.--If, as of the
date that is 18 months after the date of
enactment of this Act, the Public Company
Accounting Oversight Board and the American
Institute of Certified Public Accountants have
not issued a joint approval described in clause
(i), the 18-month deadline described in that
clause with respect to that approval shall be
extended by consecutive 180-day periods until
the date on which those entities issue such an
approval.
(b) Reports.--
(1) In general.--An auditing firm that prepares an
attestation under subsection (a) with respect to an entity
shall, after making the attestation, submit to the Under
Secretary a report that addresses the following with respect to
the entity:
(A) Cryptographic proof of possession or control
over keys that are capable of effectuating the
transfer, change of control, or movement of a chain of
assets that are owned by a person other than that
entity, such as a customer of the entity.
(B) Verification of cryptographic proof of reserves
of the entity.
(C)(i) Verification of cryptographic proof of the
liabilities of the entity.
(ii) For the purposes of clause (i), cryptographic
proof means a cryptographically verifiable attestation
using a Merkle tree structure, a zero-knowledge proof,
or another similar mechanism that can prove--
(I) the existence of the applicable
liabilities; and
(II) that the applicable liabilities are
the legal responsibility of the entity that is
the subject of the report.
(2) Public availability.--The Under Secretary, through the
Office, shall make each report received under paragraph (1)
available to the public, which shall include, in addition to
the material described in subparagraphs (A), (B), and (C) of
that paragraph--
(A) the name of the entity for which the
attestation that is the subject of the report was
performed; and
(B) the name of the auditing firm that made the
attestation described in subparagraph (A) of this
paragraph.
(c) Enforcement.--
(1) Civil penalties.--
(A) In general.--With respect to an entity that is
subject to the requirements under subsection (a) and
fails to satisfy those requirements, the Under
Secretary, through the Office, shall, subject to
subparagraph (B), impose a civil penalty on the entity
as follows:
(i) If that failure is the only such
failure by the entity during the most recent
24-month period, the amount of the penalty
shall be the greater of the following:
(I) 25 cents per user or customer
of the entity (as applicable), as of
the date on which the penalty is
imposed.
(II) 2.5 basis points of the total
assets under management by the entity,
as of the date on which the penalty is
imposed.
(ii) If the entity has 1 additional such
failure during the most recent 24-month period,
the amount of the penalty shall be the greater
of the following:
(I) 55 cents per user or customer
of the entity (as applicable), as of
the date on which the penalty is
imposed.
(II) 5.5 basis points of the total
assets under management by the entity,
as of the date on which the penalty is
imposed.
(iii) If the entity has more than 1
additional such failure during the most recent
24-month period, the amount of the penalty
shall be the greater of the following:
(I) 90 cents per user or customer
of the entity (as applicable), as of
the date on which the penalty is
imposed.
(II) 9 basis points of the total
assets under management by the entity,
as of the date on which the penalty is
imposed.
(B) Limitation.--The Under Secretary, through the
Office, may not impose a penalty on an entity under
subparagraph (A) if the imposition of that penalty
would cause the total amount of penalties imposed on
that entity under that subparagraph for the year in
which the penalty would be imposed to exceed the lesser
of the following:
(i) $1 per user or customer of the entity
(as applicable), as of the date on which the
penalty would be imposed.
(ii) 10 basis points of the total assets
under management by the entity, as of the date
on which the penalty would be imposed.
(2) Publication.--The Under Secretary, through the Office,
shall make publicly available, with respect to the most recent
24-month period, the name of each entity that is subject to the
requirements under subsection (a) and has failed to satisfy
those requirements.
(3) Appeals.--
(A) In general.--The Under Secretary shall
establish a process through which an entity on which a
penalty is imposed under paragraph (1) may appeal that
penalty.
(B) Waiver of penalty.--The Under Secretary shall
waive a penalty imposed under paragraph (1) if the
Under Secretary determines in an appeal brought under
subparagraph (A) of this paragraph that the reason that
the Under Secretary did not receive a report under
subsection (b)(1) is because of an action or omission
by an auditing firm and not the entity on which the
Under Secretary imposed the penalty.
(C) Pause in payment.--An entity on which the Under
Secretary imposes a penalty under paragraph (1) shall
not be required to pay that penalty during the period
in which an appeal brought by the entity under this
paragraph is pending.
(d) Effective Date.--This section shall take effect on the date on
which the Public Company Accounting Oversight Board and the American
Institute of Certified Public Accountants jointly approve, under
subsection (a)(3), an industry standard for the attestations required
under this section.
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