Ankura Consulting Group LLC
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On June 7, Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand
(D-NY) released their highly anticipated bill – the Responsible
Financial Innovation Act – that would create a legal framework to
govern digital assets. The bill represents one of the first
comprehensive, bipartisan bills introduced by the U.S. Congress
focused on digital assets and the technologies that underpin them
(i.e., blockchain technology).
As written, the bill would have far-reaching implications for
the digital asset industry. However, at this point, the chances of
the bill passing into law over the short term are slim. While the
recent meltdown in the cryptocurrency market has pushed regulating
digital assets higher on the agenda for governments everywhere,
lawmakers in the U.S. have several other priorities – like
inflation and the upcoming midterm elections – that will likely
take up much of their focus throughout the rest of the year. That
said, the bill is largely being positioned as a starting point for
lawmakers to frame their efforts in a push to pass legislation
sometime next year.
- Establishes the CFTC as the Primary Regulator of
Digital Assets – Most notably, the bill would effectively
establish the Commodity Futures Trading Commission (CFTC) as the
primary regulator of digital assets by (a) providing the agency
with “exclusive spot market jurisdiction” over digital
assets, (b) codifying a crypto-specific interpretation of the Howey
test that is used by the SEC to determine if an asset is a
security, and (c) defining most digital assets as “ancillary
assets” and treating them as commodities, thus putting them
under the CFTC’s jurisdiction. 1
- Stablecoin Reserve Requirements – Stablecoin
issuers would be required to (a) maintain high-quality liquid
assets valued at 100% of the face value of issued stablecoins, (b)
provide monthly disclosures on such assets, and (c) guarantee the
ability to redeem all stablecoins at par in legal tender.
- Stablecoin Issuance Process for Banks and Credit Unions
– Establishes a procedure for banks and credit unions to
issue stablecoins by establishing a separate depository institution
affiliate and securing the necessary regulatory approvals.
- Regulatory Reporting Requirements – Sets a
number of reporting requirements for operators in the digital
assets industry. In particular, issuers of digital assets that are
considered “ancillary assets” would have to submit
twice-annual disclosures to the SEC on the valuation and management
of those assets. In addition, digital asset service providers would
be required to provide clear consumer notices, and require
acknowledgement of, on a number of matters ranging from material
source code updates to how a bankruptcy or insolvency scenario
would be handled.
- Digital Asset Exchange Registration Requirements and
Fees – Establishes a pathway for digital asset exchanges
to register with the CFTC. In addition, the bill would permit the
CFTC to impose user fees on digital asset exchanges to cover
- Crypto Broker Tax Reporting Requirements –
Delays for two years (until 2025) and amends the mandatory yearly
tax reporting requirements for crypto brokers that were passed last
year as part of the Infrastructure Investment and Jobs Act.
- Tax Exemption for Crypto Transactions Less than $200
– Provides a tax exemption for all
transactions for goods and services under $200.
- Tax Exemption for Digital Asset Lending Agreements
– Specifies that so-called digital asset lending
agreements are not generally taxable events.
- Tax Exemption for Crypto Mining and Staking –
Establishes that digital assets
obtained from mining or staking are not to be treated as taxable
income until they are converted into fiat currency and gains or
losses are realized.
- Decentralized Autonomous Organization (DAO)
Registration Requirements – Requires community-led
decentralized autonomous organizations (DAOs) to classify as
business entities that must be incorporated as an LLC, corporation,
partnership, foundation, cooperative, or similar organization.
- Government Studies on Key Issues – Directs a
number of government agencies to conduct studies on key issues
within the digital asset industry. For example, the bill directs
the Treasury Department, the Federal Energy Regulatory Commission
(FERC), the SEC, and the CFTC to conduct studies on (a)
opportunities, benefits, and challenges associated with
decentralized finance, (a) energy consumption related to digital
assets, (b) how the digital assets industry self regulates and how
registered digital asset associations should be established, and
(c) cybersecurity standards for digital asset intermediaries.
- Advisory Committee on Financial Innovation –
Proposes an Advisory Committee on Financial Innovation that
includes industry representatives, the SEC, CFTC, a Federal Reserve
Board member, a state regulator, and consumer protection
What to Expect Moving Forward
So far, the bill has received widespread praise from the digital
assets industry and some pushback from consumer advocates. In
particular, Blockchain Association Executive Director Kristin Smith
noted in a statement that the bill, “represents a milestone
moment for crypto policy and a major step forward for the crypto
industry in Washington.” 2 Similarly, Perianne
Boring, chief executive of the Chamber for Digital Commerce, called
it a “foundational, comprehensive start.” 3
And Sheila Warren, chief executive of the Crypto Council for
Innovation, said the bill amounts to “a significant step
forward.” 4 Critics of the bill, however, have
argued that it would undermine securities law and open consumers
and investors to undue harm. For instance, Mark Hays, a senior
policy analyst on fintech for the Americans for Financial Reform
said the bill “would do quite a bit to undermine existing
securities laws by creating an alternative route that could bypass
the current, time-tested rules.” 5
While the bill marks a significant step forward for the U.S.
Congress in defining a legal framework for digital assets, the bill
is unlikely to pass this year. In fact, several reports suggest
that in a briefing with reporters before the bill was released, the
staff of both Sens. Lummis and Gillibrand suggested that the bill
would likely be advanced in a piecemeal fashion through various
committees in an effort to make it ready to pass sometime next
year. 6 That said, it should be noted that the lead
sponsors of the bill sit on key committees with jurisdiction over
its proposed provisions – Sen. Lummis serves on the Senate Banking
Committee that oversees the SEC and Sen. Gillibrand sits on the
Senate Agriculture Committee that oversees the CFTC – that may help
Moving forward, the bill will likely be used to frame the
ongoing legislative and regulatory debate around digital assets
within the U.S. In addition, the strategy of passing the bill piece
by piece through Congress provides an opportunity for lawmakers to
fast-track high-priority provisions – like the stablecoin reserve
requirements. However, significant revisions to the bill should be
expected as it meanders through the legislative process.
The full text of the bill can be found here. A section-by-section overview can be
found here. The press release announcing the bill
can be found here. A joint blog from Sens. Lummis (R-WY)
and Gillibrand (D-NY) on the bill can be found here.
1 As defined by the bill, “ancillary assets”
would be an “intangible, fungible asset that is offered, sold,
or otherwise provided to a person in connection with the purchase
and sale of a security through an arrangement or scheme that
constitutes an investment contract.” According to reports, those close to the bill’s drafting
suggested that this definition would apply to the 200 most valuable
cryptocurrencies listed on CryptoMarketCap.
2 Newmyer, T. (2022, June 7). Crypto industry scores a
big win under long-anticipated Senate bill. The Washington Post.
Retrieved June 8, 2022, from https://www.washingtonpost.com/business/2022/06/07/crypto-lummis-gillibrand-regulation/
5 Kiernan, P. (2022, June 7). Senators propose
industry-friendly cryptocurrency Bill. The Wall Street Journal.
Retrieved June 8, 2022, from https://www.wsj.com/articles/senators-to-propose-industry-friendly-cryptocurrency-bill-11654592401
6 Davidson, K., & Weaver, A. (2022, June 7). The
Fed’s new framework ages fast. POLITICO. Retrieved June 8,
2022, from https://www.politico.com/newsletters/morning-money/2022/06/07/the-feds-new-framework-ages-fast-00037653
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