On June 7, 2022, U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act which aims to provide greater regulatory clarity for the crypto ecosystem by proposing a “broad-based” framework for the industry. As the first bipartisan, comprehensive bill to be introduced in the Senate, the digital asset community is looking for the “landmark legislation” to lay the groundwork for regulatory and enforcement clarity. This proposal follows President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, as well as other policy and enforcement activity.
ISSUE
There has been increased interest from lawmakers and industry to clarify a regulatory roadmap for crypto entities. Today’s bill marks a notable step to do just that. The bill addresses a range of issues related to regulatory oversight and enforcement, legal definitions of digital assets and virtual currencies, consumer protection standards, energy consumption, and taxation, among others. The bill introduction represents the “start of the conversation”, as Senator Gillibrand said in today’s CNBC interview: "Our goal is to make sure this goes through the four committees of jurisdiction. It takes a long time to build a regulatory framework for a new industry."
WHAT DOES IT MEAN?
A range of policy and industry stakeholders continue to pursue greater predictability in the regulatory environment. In March, the Biden administration initiated action by releasing an Executive Order that directed a “whole-of-government” focus on the emerging digital asset class. Shortly thereafter, in April, the Digital Commodity Exchange Act was introduced which “[aimed] to give the Commodity Futures Trading Commission a bigger role in overseeing crypto spot markets,” as well as creating a definition for “digital commodity.” Overall, the “118th Congress has reached a milestone of seeing 50 bills and resolutions that have been introduced so far which cover the crypto regulatory landscape in a variety of ways.” On the enforcement side, both the CFTC and SEC have initiated their own action.
In late May, Senators Lummis and Gillibrand signaled at the DC Blockchain Summit that a proposal was forthcoming. Sen. Gillibrand said at that event the “bill would keep in place the [Howey] Test for other cryptos, a doctrine that U.S. courts and regulators use to determine whether or not a financial instrument should be considered a security…. It would also make clear that miners of bitcoin or other cryptos are not considered broker-dealers and would therefore not be subject to more stringent Internal Revenue Service reporting requirements.” A draft version of the bill, dated March 1, became available days after the event – though Lummis tweeted that the draft was “incredibly out of date” compared to the current bill.
WHY DOES IT MATTER?
While this isn’t the first bipartisan, comprehensive bill which has been introduced, it is expected to be the framework that both chambers and sides will build upon together. In fact, the industry appears to see this policy development as an important moment as it has increased education efforts in recent days to provide feedback “on how to approach everything from crypto exchange regulations to tax policy.” And although some lawmakers have already been identified as public supporters of digital assets, debates in future committee hearings should highlight policy perspectives of countless more lawmakers who have yet to express their views on crypto publicly. Here are some key takeaways from the bill:
- The bill “would classify digital assets as commodities like wheat or oil and empower the Commodity Futures Trading Commission… [and] with few exceptions, the bill designates digital currencies as “ancillary assets,” or intangible, fungible assets that are offered or sold in tandem with a purchase and sale of a security. Those ancillary assets would be treated like commodities under U.S. law and fall under the jurisdiction of the CFTC.”
- “Cryptocurrencies and other digital coins won’t be treated like traditional securities under the Securities and Exchange Commission’s scrutiny unless the holder is entitled to the privileges enjoyed by corporate investors like dividends, liquidation rights or a financial interest in the issuer.”
- The bill “proposes legal definitions of digital assets and virtual currencies [and] would require the IRS to adopt guidance on merchant acceptance of digital assets and charitable contributions.”
- The “legislation imposes disclosure requirements on digital asset firms to ensure that consumers can make informed decisions, delineates agency responsibilities over various digital assets — such as Commodity Futures Trading Commission jurisdiction over bitcoin — and requires a study on digital asset energy consumption.”
- The bill also outlines responsible taxation of digital assets. “The bill would liberate small-scale purchases of goods and services from the mire of tax implications by making it all tax-free on transactions less than $200 – potentially clearing a path for a cryptocurrency that acts more like a currency.”
- In addition, the bill “directs the CFTC and SEC to consult with Treasury and the National Institute of Standards and Technology to develop comprehensive, principles-based guidance relating to cybersecurity for digital asset intermediaries.” Further, the proposed legislation “directs the Office of Management and Budget, along with the Cybersecurity and Infrastructure Security Agency, the Director of National Intelligence, and the Defense Department, to conduct an information security study around the digital yuan, China’s central bank digital currency.”
Today, I’m introducing the Responsible Financial Innovation Act alongside @SenGillibrand. The United States is the global financial leader, and it’s absolutely critical the U.S. plays a leading role in this new frontier.”
-U.S. Senator Cynthia Lummis, R-WY (Source: Twitter)
“Today, @SenLummis and I are introducing the Responsible Financial Innovation Act, our bill to create a regulatory framework for digital assets. This bill will protect consumers and provide clarity and certainty to the industry and regulators..”
-U.S. Senator Kirsten Gillibrand, D-NY (Source: Twitter)
“[Bill] represents a milestone moment for crypto policy and a major step forward for the crypto industry in Washington.”
-Kristin Smith, Executive Director of Blockchain Association (Source: Washington Post)
“[Bill is] a significant step forward. The crypto community has called for greater regulatory clarity, and we look forward to continuing to collaborate with policymakers across the political spectrum in the next stages of discussion and work ahead.”
-Sheila Warren, Chief Executive of the Crypto Council for Innovation (Source: Washington Post)
WHERE IS IT GOING?
As for process, both senators have noted that the bill will move through regular order and is expected to be referred to four committees of jurisdiction in the Senate (banking, agriculture, intelligence and finance) which implies that the process is expected to take some time. Both lawmakers made clear that they’ve been in close contact with leadership and the White House and that they hope substantial movement on the legislation will take place before the new Congress next year, but wouldn’t rule out having to continue work in the next Congress. While this is an important moment – two leading senators in the crypto policy space introducing a comprehensive bill – the proposed legislation is unlikely to be a discussion that leads to legislation this year; there’s just not enough time. So the next Congress will likely be the one to move an actual bill.
The big issue that this bill takes sides on – but is unresolved where Congress ultimately lands – is who is going to be the regulator: SEC or CFTC. The committees of jurisdiction will have a significant debate over this. As it is currently written, the bill “[gives] primary responsibility for crypto oversight to the CFTC… and sidelines the SEC, whose chair, Gary Gensler, has taken an aggressive posture toward crypto interests.” In short, this is still going to take some time – but a foundation has been laid. Given the evolving policy environment around digital assets, companies in the space should continue to closely monitor policy activity in Congress, and across federal agencies. Companies should also outline clear policy positions and recommendations as they engage policymakers and key stakeholders.
Contributions from Catherine Costakos, Rachel Millard, Adam Ontiveros Oberg, Hyun Shin, and Natalie Short.
