Bipartisan crypto legislation titled “the Responsible Financial Innovation Act” was introduced Tuesday by Cynthia Lummis (R-WY) from the Senate Banking Committee and Kirsten Gillibrand (D-NY) from the Senate Agriculture Committee.
The bill addresses many thorny issues with regards to cryptocurrency regulation, such as delineations between CFTC and SEC jurisdictions, stablecoin collateralization requirements, and the treatment of digital assets for tax purposes. The goal of the bill is to generate more flexibility, innovation, consumer protection, and transparency while providing more certainty and clarity to the growing digital assets industry.
- US Senator Cynthia Lummis (R-WY)
- US Senator Kirsten Gillibrand (D-NY)
- Gary Gensler, Chairman SEC
- Rostin Behnam, Chief CFTC
- Dennis Kelleher, Co-Founder Better Markets and served on Biden’s transition team
The cryptocurrency industry has long asked for more regulatory clarity, especially in terms of which projects fall under the SEC jurisdiction as securities and those that are part of the CFTC’s jurisdiction as commodities. The SEC oversees all securities activity, with the exception of derivatives contracts that track commodities based on the old case law and the Howey Test. However, as this new technology has taken off, most tokens do not fall neatly into a security or commodity bucket, leading to many different interpretations and projects who want to stay in the US spending a lot on compliance and legal resources and expenses. To date, the only tokens that have been effectively deemed commodities are bitcoin and arguably ether.
Specifically, the bill offers a modified version of the Digital Commodity Exchange Act, a piece of legislation 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 give the CFTC a larger group of token projects to oversee, arguably taking power from the SEC. The bill introduces new language and definitions to define digital assets. Specifically, it coins the term “ancillary asset”, which is a token provided to a purchaser under an investment contract that is not inherently a security. The legislation grants the CFTC exclusive spot market jurisdiction over all fungible assets which are not securities, including ancillary assets. The presumption that an ancillary asset is a commodity can be appealed in court.
This bill is the latest of many prior efforts that have been offered into 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 grounds and congressional intractability across a wide range of issues beyond cryptocurrency.
Rostin Behnam, the chief of the CFTC had positive things to say about the new bill that would establish his agency as a significant crypto regulator in the US “It does a very good job,” Behnam said Wednesday at a cryptocurrency event hosted by the Washington post. “One of the trickiest things we’re going to have to do – and I think they address this very well – is deciphering between a commodity and security.”
The bill appears to have more momentum than prior congressional efforts at crypto regulation. Not only is it bipartisan, it appears the bill was shared with at least some relevant federal agencies that gave feedback prior to submission. These efforts already give it a step up from prior efforts, such as the Token Taxonomy Act, originally introduced in 2019 and then reintroduced by Rep. Warren Davidson (R-OH) in May 2021. As the name suggests, the Token Taxonomy Act tried to provide a clear definition of a token that would be exempt from securities laws. The bill did not pass and received some criticism about being written too ambiguously and leaving too much up to the SEC interpretation. At that time, members of the senate also questioned if this kind of bill was necessary.
Still, the long legislative process makes it unlikely that the bill will pass this year, as there will be time for the industry to comment over the next six months and the bill will continue to be refined. It is expected that the bipartisan legislation will go through the Senate’s Banking, Agriculture, Intelligence and Banking Committees and then the equivalent committees in the House. Under these committees, the bill may move forward as a whole or in different parts.
Additionally, Biden’s Executive Order on March 9, 2022 asked various regulatory agencies to investigate and submit reports on a similar list of topics included in the bill. The Order required within 180 days of the Secretary of the Treasury (in consultation with other agencies) to submit a report on the future of money and payment systems. These reports will likely be submitted by September 2022. Many people on the hill will likely be interested in seeing the results of the Executive Order studies before reviewing or moving the bill forward.
The industry has been widely supportive of the bill. “This bill sets a framework for how tokens should be treated for regulatory compliance purposes. As a result, this will give clear guidance, promote business formation in the US, and ultimately result in fewer surprise enforcement cases. The next steps are to promote the principles laid forward to the wider Congress,” says Michelle Bond, CEO of ADAM
But others have started to voice concerns focusing on the CFTC’s capability to administer its growing powers. Dennis Kelleher, a co-founder of Better Markets, a prominent financial reform advocacy group and who served on President Joe Biden’s transition team, said that handing crypto regulation to the CFTC is a deliberate attempt to shove responsibility onto an agency that Congress has left without resources for years. He said the legislation, in effect, deregulates crypto because the CFTC is not equipped to regulate the complex and fast-growing sector. “The CFTC is the smallest financial regulator with the smallest budget,” he said. “Wall Street and its allies in Congress have made sure that the CFTC has been chronically underfunded for years, making it impossible for the CFTC to even fulfill its current responsibilities.”
Conversely, in May 2022 the SEC announced the allocation of 20 additional positions to the unit responsible for protecting investors in crypto markets and from cyber-related threats. The newly renamed Crypto Assets and Cyber Unit (formerly known as the Cyber Unit) in the Division of Enforcement will grow to 50 dedicated positions.
It is also worth remembering that unlike the SEC, the CFTC does not have the same investor protection mandate. Investor protection remains a big focus for the Biden Administration and a growing concern in the industry after 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 responsibly set up (have real utility in a layer 1 or layer 2 protocol) and legally compliant will benefit from the additional regulatory clarity.
The bill should also have a calming effect on investors’ fears regarding a regulatory clampdown on certain projects. Projects not yet sufficiently decentralized would be required to file minimum disclosures with the SEC that will be less burdensome than current procedures, but still helpful to investors. Once that project becomes fully decentralized, those reporting requirements would end and compliance costs reduced.
This would also allow cryptocurrency exchanges to feel more comfortable with listing projects where the cryptocurrency associated has real utility. Cryptocurrency exchanges currently put a lot of resources in conducting token reviews, comparing tokens against the Howey Test to try and determine if they feel comfortable listing. Exchanges are also currently in a catch 22, where the SEC has said some are listing many tokens that are unregistered securities and the exchange should be registered as a broker dealer but it remains a question if the SEC/FINRA will even approve an application to be a cryptocurrency related broker dealer.
Still, cryptocurrency projects that offer a digital asset that provides holders with debt or equity or create rights to profits or other financial interests in a business entity would still themselves need to register and be regulated with the SEC. This still would be helpful to investors because it makes it more clear which projects are embracing regulation and which are trying to avoid regulation and putting consumers at risk.