It was first reported before Christmas that Wyoming Senator Cynthia Lummis was planning to introduce a comprehensive crypto regulation bill. Republican Lummis was already known for her pro-crypto stance and she immediately announced that she was looking for a Democratic co-sponsor. New York Senator Kirsten Gillibrand, who was not known to have a strong position on cryptocurrencies, was named a co-sponsor in March. The long-awaited Responsible Financial Innovation Act (RFIA) was introduced in the US Senate on June 7.
The RFIA is 69 pages of text filled with cryptographic and legal jargon. However, there is an element of drama lurking behind the bill’s dry language, as it sets out what must be done and who must do it in the face of inaction, confusion and interagency competition that characterize asset regulation. digital in the United States today. .
Lummis and Gillibrand are well prepared for the task. Lummis is a member of the Senate Banking Committee, which oversees the Securities and Exchange Commission (SEC), a major 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 main regulator” of the digital assets market, Gillibrand said in a Washington Post live broadcast on June 8. “They just have an obligation to regulate Bitcoin and Ether, the majority of cryptocurrencies today. But the SEC has an enormous responsibility. […] And so we’re not minimizing the role of the SEC, but we’re empowering both regulatory agencies to start taking over this market and making it safe and sound.”
Division of labour
The two senators have repeatedly said that most altcoins are securities, as SEC Chairman Gary Gensler has long maintained, and the RFIA continues to rely on the Howey test to define securities. That test was introduced in a 1946 Supreme Court decision on Florida orange grove sales.
Under the Howey Test, those sales of orange groves, predominantly to buyers who were not farmers and were not located in Florida and who could leave the land under the management of the previous owner WJ Howey Co., were investment contracts and therefore , securities under the Securities Act of 1933.
The innovation in RFIA comes from an extrapolation of the Howey test. Lilya Tessler, head of the fintech and blockchain group at law firm Sidley, told Cointelegraph:
“The Court did not say that oranges are securities. The Court never said which law applies to the object of an investment contract”.
For purposes of the RFIA, the subject matter of an investment contract is a commodity and is subject to CFTC regulation, unless it can be shown that it is a security. And it will be called an ancillary asset, a new term in cryptocurrency regulation. Tokens in an initial coin offering (ICO) were used as an example in a discussion of ancillary assets. The bill’s definition of an ancillary asset also specifies that it be fungible.
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This innovation does not eliminate the issue of decentralization. It was decentralization, Tessler recalls, that established Bitcoin (BTC) and Ether (ETH) as commodities, according to the principles William Hinman outlined in his controversial 2018 speech. Under the RFIA, ancillary assets that are not sufficiently decentralized will be required to file disclosures twice a year with the SEC.
Patrick Daugherty, a partner at Foley & Lardner, praised that solution. “It’s creative,” Daugherty told Cointelegraph. “It’s not dictated by case law, but it’s in line with traditional views on the value of regular disclosure.”
The legislation gives the CFTC regulatory authority over crypto asset spot markets, 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 Commodities Exchange Act, introduced in the House of Representatives this year, also called for CFTC oversight of that market.
The RFIA gives the CFTC the right to collect regulatory fees to fund its additional activities.
Pay your taxes, or not
One provision of the bill that is sure to please cryptocurrency users is a $200 exclusion from gross receipts for transactions that use cryptocurrency to purchase goods and services. This exclusion allows cryptocurrencies to be used as intended without creating a potential taxable capital gain. This is also not a new idea.
Mining and staking earnings would be taxable when realized under the RFIA. This provides the clarity that Joshua and Jessica Jarrett seek in their case against the Internal Revenue Service, Raul Garcia, a certified public accountant and director of Kaufman Rossin, told Cointelegraph.
The bill mandates a report on investment for retirement in digital assets, another recent litigation issue, from the Comptroller General.
The floor of the US Senate.
The brief section on Decentralized Autonomous Organizations (DAO) is the most complex. It establishes that DAOs are taxed business entities and encourages their constitution. An exception is made when the DAO is raising funds for charity.
This provision opens “an opportunity for another state to do what Delaware and South Dakota did,” Garcia said. Those states have become centers for the registration of other forms of business entities.
The bill also directs the Secretary of the Treasury, or a delegate, to adopt guidance on a list of open questions within one year of the bill’s enactment.
do your work
The RFIA directed the Federal Reserve to process bank applications for digital assets for master accounts “on an equitable basis” and on a first-come, first-served basis. Digital asset bank Custodia filed a lawsuit 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 that the Fed broke the law by withholding its application for a master account for 19 months without taking action.
“It literally takes an act of Congress for them to do their job,” Daugherty said, emphasizing that the bill orders the Fed to act but doesn’t tell it what to decide.
The bill dedicates an entire chapter to “Responsible Inter-institutional Coordination”, in which it calls for the preparation of various reports. Among others, it mandates periodic reports on energy consumption from the Federal Energy Regulatory Commission that requires the SEC and CFTC to consult with the Treasury and the National Institute of Standards and Technology on cybersecurity. Directs the CFTC and the SEC to develop a proposal for a self-regulatory organization.
The formation of a ten-member advisory committee is ordered. It will issue annual reports on the evolution of 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 commitments.”
Lummis has repeatedly expressed his belief that cryptocurrencies are nonpartisan. She said during the June 8 live broadcast that she was also in attendance with CFTC Chairman Rostin Behnam, who had been told by Gensler that she had not read the bill.
Senate Banking Committee Chairman Sherrod Brown told Bloomberg around the same time that he, too, had not read the bill, but was “unwilling 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.”
Blockchain Association CEO Kristin Smith called the bill a “landmark moment” in a statement. She continued, “We thank Senators Lummis and Gillibrand for engaging with the industry on this bill, and we look forward to continuing to work with them as we refine the language and move forward in the bill process.”
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Better Markets President and CEO Dennis M. Kelleher released a statement saying that the bill “appears to be designed to disarm the public into thinking that cryptocurrencies will be properly regulated while industry and pundits know That’s just not true.”
Americans for Financial Reform Senior Policy Analyst Mark Hays 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 rulebook.”
Senate Agriculture Committee Chair Debbie Stabenow and Ranking Member John Boozman are also expected to introduce legislation on crypto regulation. That bill is reported to favor the CFTC in taking the lead in regulation.
This post Lummis-Gillibrand Cryptocurrency Bill Is Complete But Still Creates a Divide
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