119-s1405

[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[S. 1405 Introduced in Senate

    (IS) ]

<DOC>

119th CONGRESS
 1st Session
 S. 1405

 To impose requirements on digital exchanges, and for other purposes.

_______________________________________________________________________

 IN THE SENATE OF THE UNITED STATES

 April 10, 2025

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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