- Over the past year, at least 16% of Americans have traded cryptocurrencies – a $1.7 trillion industry that has grown significantly since 2017.
- Despite the size and growth of this market, cryptocurrencies have several regulatory gaps, and federal regulatory oversight of the market is severely underdeveloped.
- Senators Cynthia Lummis and Kirsten Gillibrand deserve credit for introducing the Responsible Financial Innovation Act, which aims to create the first comprehensive regulatory framework for digital assets. Nonetheless, the move to treat most cryptocurrencies as regulated commodities by the Commodity Futures Trading Commission would create a remarkably industry-friendly framework overseen in its entirety by a relatively small regulator with no significant fintech experience.
A market that didn’t exist before 2017 is now causing headaches for regulators and policymakers in Washington, as a growing number of Americans – around 16% – are investing, trading or using cryptocurrencies. Wyoming and Arizona are reportedly considering accepting tax payments in the form of digital currencies. The new mayor of New York has received his first salary in cryptocurrencies.
Despite the growing use of digital assets and the presence of new fintech entrants in the financial services sector, federal oversight and oversight of a market that surpassed $3 trillion in November last year have been piecemeal, contradictory and in many cases have relied on existing regulations. almost a century. The United States lacks a comprehensive and coherent federal regulatory framework for the “Wild West” of digital assets, and this is largely due to the difficulty posed by several fundamental questions that the industry raises. What exactly is a cryptocurrency? What is a fintech? How should either be regulated and by whom? While a March executive order calling for a whole-of-government approach to digital asset regulation recognized the need for these structural questions, it deferred answering one of them, instead commissioning a broad series of reports. and research across government.
In the Responsible Financial Innovation Bill, Senators Cynthia Lummis and Kirsten Gillibrand showed that Congress is ready to be a little braver. In what the senators call “the most substantial and comprehensive bipartisan effort to bring certainty and clarity,” the bill would create a “comprehensive regulatory framework” for digital assets. Most notably, the senators took a stand on what cryptocurrencies are (commodities for the vast majority) and which agency should regulate cryptocurrencies (the Commodities Futures Trading Commission (CFTC)). In doing so, the senators have chosen sides in a regulatory turf battle between the CFTC and the Securities Exchange Commission (SEC) that, if the bill becomes law, would have a significant impact on both the future development of the crypto industry and the relevance of the CFTC.
Responsible Financial Innovation Act
The law project :
- Create a set of standard definitions. One of the main challenges for regulators in creating an overarching framework for regulating digital assets is determining the nature of financial instruments that the law should cover. Senators Lummis and Gillibrand offer standard definitions for terms such as digital asset, virtual currency and stablecoins.
- Determining whether digital assets are commodities or securities. A summary provided by the senators notes: “For the first time, this bill draws a clear distinction between digital assets that are commodities or securities by examining the rights or powers given to the consumer, giving digital asset companies the ability to determine what their regulatory obligations will be and give regulators the clarity they need to enforce existing commodity and securities laws. Although this seems to suggest that discretion should be left to regulators and cryptocurrency issuers “to determine what their regulatory obligations would be”, a truly astonishing result. codification of the current lack of clarity on this issue, the senators seem to set the scale by establishing as law that “ancillary assets” purchased under an investment contract “are not inherently securities”, thus seeming to strongly favor the idea that cryptocurrencies should be treated as commodities. Despite this, some ancillary assets considered commodities would still be required to file information with the SEC every year, which begs the question of why. Since securities are much more strictly regulated than commodities, including, among other requirements, with restrictions on pricing, this interpretation of digital assets can be seen as extremely favorable to the tech industry. cryptography.
- Give the CFTC jurisdiction over all digital assets that are not otherwise considered securities. This new “authority” is of questionable utility given that the SEC already regulates securities and the CFTC already regulates commodities; in this regard, a strict reading of the bill would not appear to create new powers. The implication here, however, is clear: the senators believe that digital assets should only be considered securities on an exceptional basis, giving the CFTC regulatory oversight over the majority of digital assets. This has significant implications for the agencies in question, as the CFTC is a considerably smaller agency with less fintech expertise. The SEC, by comparison, has been active in pursuing fintech regulation and staffing for the new needs posed by innovative technologies. Not only would this decision arguably represent a misuse of either agency, but it would somehow be an insult to SEC Chairman Gary Gensler, the federal regulator (if not the only one) that covers fintech.
- Seeking to promote consumer protection. The bill would require issuers of digital assets to provide a range of disclosures to consumers and would also clarify settlement terms and digital property rights.
- Create capital requirements for stablecoin issuers. Stablecoin issuers should maintain highly liquid capital equal to 100% of outstanding stablecoins. Stablecoins are not currently subject to capital requirements (or much regulation). Here, the senators’ goal appears to be to ensure that cryptocurrency issuers hedge against the risks posed by a run on assets that could occur if digital currencies are subject to the same constraints as real dollars.
- Clarifying responsible taxation of digital assets. The senators would allow cryptocurrency miners and “stakers” (those who pledge their assets to support a blockchain network or verify payments) to avoid tax on their business income, an extremely generous interpretation that seems difficult to justify politically given both the loss of revenue and the environmental implications of bitcoin mining.
- Commission a wide range of additional studies and research from federal financial regulators.
In addition to raising a fascinating theoretical question, the decision to treat cryptocurrencies and digital assets as commodities or securities has profound real-world implications. This distinction is important because securities are much more strictly regulated than commodities, which makes this bill particularly benevolent for the cryptocurrency industry. Separately, the decision to place responsibility for the vast majority of digital asset regulation with the CFTC seems a peculiar choice given the relative size of the SEC and the accumulated expertise of SEC Chairman Gensler.
To date, by far the biggest hurdle facing an integrated, government-wide approach to regulating digital assets and cryptocurrencies has been the reluctance to take a stand on issues of defining what is a digital asset and how it should be regulated. While Senators Lummis and Gillibrand deserve credit for taking a stand, they chose such an industry-friendly interpretation that the bill will likely face an uphill battle in Congress.