Crypto Regulation: At Long Last
The Lummis-Gillibrand Responsible Financial Innovation Act
Bi-partisan Senators pave the way for crypto regulation
The Bill "creates regulatory clarity for agencies charged with supervising digital asset markets, provides a strong, tailored regulatory framework for stablecoins, and integrates digital assets into our existing tax and banking laws,” - Sen. Cynthia Lummis (R-Wyoming)
On June 7th, a much-anticipated bill was released offering a crypto regulatory framework, considered “the most comprehensive piece of crypto legislation to date.” The framework is much-needed for crypto, since most of the industry exists in murky legal territory. Those in and out of the industry have been pushing for legal clarity. We cover highlights, lowlights, and key takeaways below.
In broad sweeping strokes, two bi-partisan Senators — Republican senator Cynthia Lumis and Democrat Kirsten Gillibrand — unleashed a tidal wave of dramatic changes upon the crypto regulatory landscape. Markets, the twitter-sphere, the news cycle, and banking industries are reacting across . This is the first draft of the bill, and has not passed House or Senate yet, and is unlikely to do so prior to mid-terms.
Some of the highlights:
The bill puts digital asset spot markets under the purview of the Commodity Futures Trading Commission (CFTC), rather than the SEC. This move is generally seen as a long-term positive for the crypto community because the regulatory burden would be less significant under the CFTC.
The bill leaves the possibility for certain digital assets to be regulated as securities under the SEC. This distinction occurs when an asset serves as debt or equity, or provide rights to profits or financial interests in a company.
To legitimizing digital asset exchanges under the umbrella of existing regulation, the bill outlines procedures for these exchanges to register as financial services entities.
Customers’ assets are guaranteed to be safeguarded by an exchange in the case of bankruptcy.
The proposal provides the clearest regulation for stablecoin issuers yet, a long-awaited framework after the collapse of the algorithmic stablecoin terraUSD.
Good News for Crypto
There is general reporting that the news is positive for the crypto industry. However, given the extreme early stages of the bill passing, we can mostly look to this as a framework for understanding regulator’s mindset around how to treat digital assets.
Stablecoin Regulation
We’ve written that stablecoin regulation would be the hottest crypto topic in Congress. This bill, coming in the wake of the Terra/UST stablecoin collapse, directly addresses the concerns.
In the proposal, stablecoin issuers must disclose all of their assets and must have a 100% backing of U.S. dollars to the digital stablecoins. Notably, it provides guidance to banks/credit unions to issue stablecoins, but does not explicitly require stablecoin issuers to be banks/credit unions. This is a major blow to banks!
In fact, Section 702 of the legislation would make it easier for non-banks to access payment, clearing, and settlement services provided by central banks. The clause enables more individuals to get a Fed bank account. This “banking for all” ethos is a core tenet of crypto, and is embraced by Lummis and Gillibrand. Currently, a bank account is a privilege. Traditional players are lobbying against the legislation change change to preserve the exclusive rights they rely on, at the expense of a level playing field for financial inclusivity.
Isaac Boltansky, director of policy research at the financial services firm BTIG, said Section 702 will be a battleground issue in the months — and potentially years — ahead, as federally supervised banks look to protect their position as the sole holders of Fed accounts. “Access to the Fed is one of the last meaningful moats for the traditional banking industry,” Boltansky said.
We’ve said it before, Bye Bye Banks. The crypto industry is eating banks’ lunch, a trend propagated by the fintech industry over the last decade, and this provision does nothing to stop that.
Taxation
Cryptocurrencies like bitcoin are taxed like property when, at times, they are a form of payment. Currently, any transaction, even simply buying a coffee, becomes a taxable event that requires reporting and could incur capital gains taxes. This bill allows for a tax exclusion on crypto payments up to $200 per transaction. This would likely increase retail use from both retailers and consumers.
In general, the bill would require the IRS to issue clearer guidance on a wide array of crypto-related areas including mining, lending contracts, and forks and airdrops.
Bankruptcy Clarity
Bankruptcy definition changes benefit consumers. The bill makes it clear that assets deposited would get returned to users and not liquidated.
Negative Views Expressed
Much of the nature of crypto is meant to be open-sourced, decentralized, and permissionless.
These aspects comes with good and bad. The good is that it provides more access, efficiency, and liquidity to financial services, allows more ownership over data, and allows for more customization and innovation in digital commerce. The downsides stem from the unregulated nature of the sector, including that it allows for scams and untested financial products and ideas.
The key is finding a balance between regulation and innovation.
Some parts of the bill that attempt to regulate areas of crypto could be onerous on builders in the space and cause innovation to suffer at the expense of administrative requirements. Some examples of this include:
DAO’s will now have to be registered as legal entities. This could take away a key component of DAO’s, mainly that no single majority has control over them.
Digital asset exchange oversight is ramping up a lot. This means that there will be more compliance costs, and more costs passed onto consumers.
Decentralized exchanges are built off smart contracts, and theoretically don’t have to be companies, they can be protocols (something that anyone can use to their benefit). The bill requires all exchanges to be registered as entities, potentially eliminating the long term public good nature of these lines of code.
Since these exchange protocols are code, the bill requires users to agree on a terms of settlement document based off source code. Since code changes so frequently, most likely daily, this would be an onerous reporting requirement on exchanges, potentially stunting innovation.
The bill provides a lot of room for federal and state agencies to share more information. This could significantly impact consumers financial privacy, which is counterintuitive to what most people think crypto does.
Anything with a dividend currently might get treated as a security. This will need to be ironed out, but many coins right now offer different kinds of financial rights to holders, and will be required to register as securities. This will likely be a painful process for those involved.
Major Takeaways
This bill attempts to provide clarity.
The bill proposes the CFTC as the major regulatory body for crypto with the SEC as an ancillary regulating agency. It attempts to clarify what should be considered a security, and how cryptocurrencies should be taxed.
It attempts to provide a framework for stablecoins that does not give banks exclusivity. It attempts to protect consumers by requiring industry stakeholders such as brokers and digital assets to provide more clarity to consumers in what they are investing in (though many of these requirements may be onerous on industry builders and stunt growth), and it gives the government a framework on how to move forward.
This bill establishes clearly that crypto is allowed in the U.S., and is to be treated as a legitimate asset class. Not everything in this bill helps crypto grow in the short term, but it provides a path forward for most key stakeholders.
This bill will require months of conversations and explanations, part of which would entail splitting the bill into separate legislation to get the support to get each passed. It will likely not move forward in any form until after mid-terms.
Resources:
Article from Fortune covering the bill.
Press release from Wyoming Senator Cynthia Lummis.
The bill itself.
More details on why this is the bill that has banks on edge.
TechCrunch review of the bill as a “sigh of relief” for the industry.
Some more in-depth Twitter threads here and here breaking down specific aspects of the bill.
(Cover image credit: Valerie Pleasch/Bloomberg)
➡️ About FirstWatch Crypto ⬅️
FirstWatch Crypto was started by Dan McGlinn (@DigitalDanMcG) and John "Blaize" Hrabrick (@blaizebitcoin) who have been investing in the space for a combined 8 years. FirstWatch Crypto is on a mission to simplify the crypto investment landscape.