[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[S. 3087 Introduced in Senate (IS)]

<DOC>






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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