Proposed bipartisan legislation aims to clarify the crypto regulatory landscape

Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R- WY) introduced new proposed legislation on June 7, 2022, which would classify the vast majority of digital assets as commodities, and empower the Commodities Futures Trading Commission (CFTC) to regulate most of the crypto industry.¹ The bipartisan bill, titled the "Responsible Financial Innovation Act,” aims to “incorporat[e] digital assets into the American financial system.”²

The legislation would ignite a significant shift in how crypto assets are regulated by oversight agencies, shifting the majority of crypto products out of the purview of the Securities and Exchange Commission (SEC), and into that of the CFTC, which would have exclusive spot market jurisdiction over all fungible digital assets that are not securities. However, those assets that entitle holders to investment privileges, like financial interests, dividends, and liquidation rights, will still be treated as securities and subject to scrutiny by the SEC. The bill also introduces a set of definitions for terms and phrases common to the fast evolving crypto industry, and includes provisions that account for taxation of digital assets, securities and commodities innovation, consumer protection, payments and banking innovation, and interagency coordination.

Critics of the legislation are reportedly concerned that the bill will not, in fact, tame the crypto market. Instead, they say, oversight by the CFTC will result in a loss of control of the crypto industry, as they argue the CFTC is underfunded and ill-equipped to regulate the complex and rapidly-changing sector. The bill is also in tension with the SEC’s increasingly active role in pursuing enforcement in this sector,³ which has included recently rebranding its Cyber Unit to the “Crypto Assets and Cyber Unit” and nearly doubling the unit in size.⁴ Despite SEC Chair Gary Gensler’s stated view that most crypto tokens are investment contracts under the Howey test, the sponsors of the bill assert instead that most digital assets are much more similar to commodities than securities.

The bill attempts to address the issue of CFTC underfunding by allowing the CFTC to assess a fee on the companies it oversees. Further, the bill seems to recognize that the CFTC has already been actively working to increase regulation and enforcement in the industry. For example, on June 2, 2022, the CFTC brought suit against the Winklevoss twins’ Gemini Trust Company (Gemini), a digital asset trading platform.⁵ Gemini is accused of misleading the Commission regarding its evaluation of a proposed bitcoin futures product. According to the complaint, Gemini made false or misleading statements of material facts, or omitted to state material facts, involving the bitcoin futures contract’s vulnerability to manipulation.

Proponents of the bill argue that it would provide helpful regulatory clarity, as it would allow token issuers to know with certainty prior to product launch whether the SEC or CFTC will be the primary regulator of their product and platform based on the purpose of the asset and the rights or powers it conveys to consumers. Others celebrate the bill’s proposed tax provisions, including an exemption from gross income for gains of up to $200 on cryptocurrency used to buy goods or services. This would make it easier to, for instance, buy a cup of coffee with Bitcoin, as the provision would allay any worry about paying capital gains taxes in connection with the purchase. Moreover, the bill seeks to clarify that miners, node operators and other crypto-transaction participants will not be considered “brokers” subject to certain tax reporting requirements, which was a question left open by the passage of the Infrastructure Investment and Jobs Act of 2021.

The bill also seeks to increase uniformity of state money transmission laws relating to digital assets and provides for the CFTC, SEC, and the crypto industry to work together to create a proposal for a self-regulatory organization for digital asset markets—similar to the Financial Industry Regulatory Authority for broker-dealers. The legislation further encourages interagency cooperation to address Environmental, Social, and Governance (ESG) concerns arising in the industry. It directs the CFTC and the SEC to work with Treasury and the National Institute of Standards and Technology (NIST) to develop guidance relating to cybersecurity for digital asset intermediaries in an attempt to curb sanctions avoidance, money laundering, and terrorist financing. It also encourages the development of rules around appropriate cybersecurity standards, threat identification and mitigation, security operations, auditing and penetration testing. The focus on ESG extends the impact of the bill to reach the Federal Energy Regulatory Commission (FERC), which is charged with analyzing and reporting on energy consumption tied to the digital assets industry. This focus on the potential environmental impact of virtual currency mining highlights the concerns of some members of Congress around reconciling technological progress with the protection and longevity of the environment and its resources.

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The introduction of the bipartisan bill is an indication that at least certain members of Congress acknowledge the long term potential for cryptocurrency and digital assets, and recognize a need for increased, comprehensive regulation around the volatile industry. Companies operating in the crypto space should continue to monitor enforcement actions and the evolving regulatory environment.

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