Lummis-Gillibrand crypto bill is comprehensive but still divisive

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It was first reported before Christmas that Wyoming Senator Cynthia Lummis plans to introduce a comprehensive crypto regulation bill. Republican Lummis was already known for her pro-crypto stance and announced right away that she was looking for a Democratic co-sponsor. New York Senator Kirsten Gillibrand, previously not known for having a strong stance on cryptocurrency, was named co-sponsor in March. The highly anticipated Responsible Financial Innovation Act (RFIA) was introduced in the United States Senate on June 7.

The RFIA contains 69 pages of thick text with legal and cryptographic jargon. There is, however, an element of drama lurking behind the bill’s dry language, as it defines what needs to be done and who should do it in the face of the inaction, confusion and inter-agency competition that characterizes the regulation of digital assets in the United States today. .

Lummis and Gillibrand are well suited for the task. Lummis is a member of the Senate Banking Committee, which oversees the Securities and Exchange Commission (SEC), a main player in the drama. Gillibrand is a member of the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission (CFTC) — another cast member.

“I don’t think the CFTC is the primary regulator” of the digital asset market, Gillibrand said during a Washington Post livestream on June 8. “They just have an obligation to regulate Bitcoin and Ether, the majority of cryptocurrencies today. But the SEC has a huge responsibility. […] And so we’re not minimizing the role of the SEC, but we’re empowering both regulators to start taking this market and making it safe and strong.

Division of labor

Both senators have repeatedly said that most altcoins are securities, as SEC Chairman Gary Gensler has long argued, and the RFIA continues to rely on the Howey test to define securities. This test was introduced in a 1946 Supreme Court decision on sales of Florida orange groves.

Under the Howey test, these sales of orange groves, primarily to buyers who were non-farmers and were not in Florida and who could leave the land under the management of former owner WJ Howey Co., were investment contracts and therefore securities under the Securities Act of 1933.

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The innovation in the RFIA comes from an extrapolation of the Howey test. Lilya Tessler, head of fintech and blockchain group at law firm Sidley, told TUSEN:

“The Court did not say that oranges are securities. The Court has never said which law applies to the subject matter of an investment contract.

For RFIA purposes, the subject matter of an investment contract is a commodity and is subject to CFTC regulation unless it can be shown to be a security. And, it will be called an ancillary asset – a term that is new to crypto regulation. Tokens in an initial coin offering (ICO) were used as an example in a discussion of ancillary assets. The bill’s definition of ancillary property also specifies that it must be fungible.

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This innovation does not eliminate the question of decentralization. It was decentralization, Tessler recalls, that made Bitcoin (BTC) and Ether (ETH) commodities, in line with the principles William Hinman laid out in his 2018 speech that proved so controversial. Under the RFIA, ancillary assets that are not sufficiently decentralized will be required to file semi-annual reports with the SEC.

Patrick Daugherty, partner at Foley & Lardner, praised this solution. “It’s creative,” Daugherty told TUSEN. “It’s not dictated by case law, but it does coincide with traditional views on the value of periodic disclosure.”

The legislation gives the CFTC regulatory authority over spot markets for crypto assets, i.e., crypto exchanges, which are now primarily subject to state money transmission laws. The added layer of regulation would mean exchanges would be subject to CFTC rules on investor protection, fund management and other requirements. The Digital Commodity Exchange Act, introduced in the House of Representatives this year, also called for oversight of this market by the CFTC.

The RFIA gives the CFTC the right to collect regulatory fees to finance its complementary activities.

Pay your taxes — or not

One provision of the bill that is sure to please crypto users is a $200 gross income exclusion for transactions using crypto for purchases of goods and services. This exclusion allows the crypto to be used as intended without creating a potential taxable capital gain. It’s not a new idea either.

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Mining and staking profits would be taxable when earned under the RFIA. This provides the clarity that Joshua and Jessica Jarret are looking for in their case against the Internal Revenue Service, Raul Garcia, chartered accountant and principal at Kaufman Rossin, told TUSEN.

The bill orders a report on retirement investing in digital assets, another recent litigation topic, from the Comptroller General.

The floor of the United States Senate.

The short section on Decentralized Autonomous Organizations (DAOs) is the most complex. It establishes that DAOs are taxable business entities and encourages their incorporation. An exception is made when the DAO raises funds for charity.

This provision opens “an opportunity for another state to do what Delaware and South Dakota did,” Garcia said. These states have become hubs for registering other forms of business entities.

The bill also directs the Secretary of the Treasury, or a delegate, to adopt guidelines on a list of open issues within one year of the bill’s proclamation.

Do your work

The RFIA has ordered the Federal Reserve to process digital asset bank applications for master accounts “on a fair basis” and in order of receipt. Digital asset bank Custodia filed suit against the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City on the day the legislation was introduced. Custodia, formerly known as Avanti, alleged the Fed broke the law by withholding its primary account application for 19 months without taking action.

“It literally takes an act of Congress to get them to do their job,” Daugherty said, pointing out that the bill directs the Fed to act but doesn’t tell it what to decide.

The draft law devotes an entire chapter to “Responsible interdepartmental coordination”, where it provides for the establishment of various reports. Among other things, it commissions regular energy consumption reports from the Federal Energy Regulatory Commission which requires the SEC and CFTC to consult with the Treasury and the National Institute of Standards and Technology on cybersecurity. It orders the CFTC and the SEC to develop a proposal for a self-regulatory body.

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An advisory committee of ten members is ordained to be formed. It will publish annual reports on developments in the digital asset industry.

Response to the bill

There was a broad consensus among observers that the bill is crypto-friendly.

“It’s really bipartisan,” Daugherty said of the RFIA. “You can see the trade-offs.”

Lummis has repeatedly expressed his belief that crypto is nonpartisan. She said during the June 8 live stream, which also featured CFTC Chairman Rostin Behnam, that Gensler told her he hadn’t read the bill.

Senate Banking Committee Chairman Sherrod Brown told Bloomberg around the same time that he also hadn’t read the bill, but was “not inclined to support it.” .

At the Wall Street Journal’s CFO Network Summit a week later, Gensler commented when asked about the bill, “We don’t want to undermine the protections we have in a $100 trillion capital market. of dollars.”

Blockchain Association executive director Kristin Smith called the bill “a landmark moment” in a statement. She continued, “We thank Senators Lummis and Gillibrand for working with industry on this bill, and we look forward to continuing to work with them as we refine the language and move the bill forward as we go along.” throughout the process.

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Better Markets President and CEO Dennis M. Kelleher released a statement, saying the bill “appears to be designed to disarm the public into believing that crypto will be properly regulated as the industry and insiders know that’s just not true.”

Mark Hays, senior policy analyst at Americans for Financial Reform, said in a statement: “Just because an industry that pumps millions into the political process claims to be innovative doesn’t mean it deserves its own special rules.”

Senate Agriculture Committee Chair Debbie Stabenow and Ranking Member John Boozman are also expected to introduce crypto regulation legislation. This bill would favor the CFTC to take the lead in regulation.