Bipartisan crypto legislation titled the “Responsible Financial Innovation Act” was introduced on Tuesday by Cynthia Lummis (R-WY) of the Senate Banking Committee and Kirsten Gillibrand (D-NY) of the Senate Agriculture Committee.
The bill addresses many thorny issues when it comes to cryptocurrency regulation, such as the delineations between CFTC and SEC jurisdictions, stablecoin collateral requirements, and the treatment of digital assets for tax purposes. The bill’s goal is to generate more flexibility, innovation, consumer protection and transparency while providing more certainty and clarity to the growing digital asset industry.
- US Senator Cynthia Lummis (R-WY)
- US Senator Kirsten Gillibrand (D-NY)
- Gary Gensler, SEC Chairman
- Rostin Behnam, Chief CFTC
- Dennis Kelleher, co-founder of Better Markets and member of Biden’s transition team
The cryptocurrency industry has long called for more regulatory clarity, especially with respect to projects that fall under the jurisdiction of the SEC as securities and those that fall under the jurisdiction of the CFTC as commodities. . The SEC oversees all securities activity except derivative contracts that track commodities based on old case law and Howey test. However, as this new technology has taken off, most tokens don’t fall neatly into a security or commodity bucket, leading to many different interpretations and projects wanting to stay in the US spending a lot for compliance and legal resources and expenses. To date, the only tokens that have actually been considered commodities are bitcoin and arguably ether.
Specifically, the bill proposes an amended version of the Digital Commodity Exchange Act, a bill proposed earlier this year in the House. The bill appears to make the CFTC the default/primary spot market regulator for the cryptocurrency industry and arguably gives the CFTC a larger group of token projects to oversee, arguably taking the power of the SEC. The bill introduces new language and definitions to define digital assets. Specifically, he coined the term “ancillary asset,” which is a token provided to a buyer as part of an investment contract that is not inherently a security. The legislation grants the CFTC exclusive cash market jurisdiction over all fungible assets that are not securities, including ancillary assets. The presumption that an ancillary asset is a commodity can be challenged in court.
This bill is the latest of many previous efforts that have been proposed in Congress to address some of these regulatory gaps and challenges in the cryptocurrency industry. None have passed so far due to a variety of factors stemming from legitimate debate, procedural motives, and Congressional insolvency on a wide range of issues beyond cryptocurrency.
Rostin Behnam, the head of the CFTC, had some positive things to say about the new bill that would establish his agency as a major crypto regulator in the United States. a cryptocurrency event hosted by the Washington Post. “One of the trickiest things we’ll have to do — and I think they handle that very well — is deciphering between a raw material and a title.”
The bill appears to have more momentum than previous Congressional crypto regulatory efforts. Not only is it bipartisan, but it appears the bill was shared with at least some relevant federal agencies who provided feedback before it was submitted. These efforts already give it a step up from previous efforts, such as the Token Taxonomy Act, originally introduced in 2019 and then reintroduced by Rep. Warren Davidson (R-OH) in May 2021. As its name l states, the Token Taxonomy Act attempted to provide a clear definition of a token that would be exempt from securities laws. The bill did not pass and was criticized for being overly ambiguous and leaving too much room for interpretation by the SEC. At that time, senators also wondered if this kind of bill was necessary.
Nonetheless, the lengthy legislative process makes it unlikely that the bill will pass this year, as industry will have time to comment over the next six months and the bill will continue to be refined. Bipartisan legislation is expected to pass through the Senate Banking, Agriculture, Intelligence and Banking Committees, and then through the equivalent House Committees. Within the framework of these committees, the bill can be advanced as a whole or in different parts.
Additionally, Biden’s executive order on March 9, 2022 directed various regulatory agencies to investigate and report on a similar list of topics included in the bill. The Order required within 180 days that the Secretary of the Treasury (in consultation with other agencies) submit a report on the future of currency and payment systems. These reports will likely be submitted by September 2022. Many people on the hill will likely be interested. to see the results of the executive order studies before revising or advancing the bill.
The industry has broadly supported the bill. “This bill establishes a framework for how tokens should be treated for regulatory compliance purposes. As a result, it will give clear direction to projects, promote business creation in the United States, and ultimately lead to fewer surprise application cases. The next steps are to promote the stated principles throughout Congress,” said Michelle Bond, CEO of ADAM.
But others have begun to voice concerns, focusing on the CFTC’s ability to administer its growing powers. Dennis Kelleher, co-founder of Better Markets, a leading financial reform advocacy group and who served on President Joe Biden’s transition team, said handing over crypto regulation to the CFTC is an attempt deliberate to pin the blame on an agency that Congress has left destitute for years. He said the legislation, in effect, deregulates crypto because the CFTC is not equipped to regulate the complex and fast-growing industry. “CFTC is the smallest financial regulator with the smallest budget,” he said. “Wall Street and its allies in Congress have ensured that the CFTC has been chronically underfunded for years, making it impossible for the CFTC to even meet its current responsibilities.”
Conversely, in May 2022, the SEC announced the allocation of 20 additional positions to the unit responsible for protecting investors in the crypto markets and against cybersecurity threats. The Division of Enforcement’s new Crypto Assets and Cyber Unit (formerly known as the Cyber Unit) will grow to 50 dedicated positions.
It’s also worth remembering that unlike the SEC, the CFTC doesn’t have the same investor protection mandate. Investor protection remains a high priority for the Biden administration and a growing concern in the industry following the LUNA crash a few weeks ago.
Even a truncated version of this bill should have a positive impact on the industry’s ability to grow. As written, cryptocurrency projects that are put together responsibly (have real utility in a Layer 1 or Layer 2 protocol) and compliant with the law will benefit from the additional regulatory clarity.
The bill should also have a calming effect on investors’ fears of tighter regulations for certain projects. Projects that are not yet sufficiently decentralized would be required to file minimal information with the SEC that will be less cumbersome than current procedures, but still useful to investors. Once this project is fully decentralized, these reporting requirements will end and compliance costs will be reduced.
It would also allow cryptocurrency exchanges to feel more comfortable listing projects where the associated cryptocurrency has real utility. Cryptocurrency exchanges currently devote a lot of resources to conducting token reviews, comparing tokens to Howey test to try to determine if they feel comfortable signing up. The exchanges are also currently in a catch 22, where the SEC has said that some are listing many tokens that are unregistered securities and the exchange should be registered as a broker, but it remains to be seen if the SEC/FINRA will even approve an application to be a cryptocurrency related broker.
Yet cryptocurrency projects that offer a digital asset that provides holders with debt or equity or creates rights to profits or other financial interests in a business entity should themselves register and be regulated. with the SEC. This would still be useful for investors, as it makes it clearer which projects are adopting regulation and which are trying to avoid regulation and put consumers at risk.
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