The Long Wait Is Over
Senator Lummis & Senator Gillibrand announce the Responsible Financial Innovation Act!
I’ll start this off with a quote from Senator, Kirsten Gillibrand.
For many everyday Americans, the word “cryptocurrency” was not a household term until recently, when blockchain technology and its many potential uses arrived in the mainstream.
But since these digital tokens were first developed over a decade ago, virtual currencies and digital assets have grown into a $1.2 trillion industry that provides opportunities to spur innovation and economic growth, democratize financial markets, and to transform access to capital for underserved communities.
I couldn’t be any more proud.
I have had the pleasure of reading most, if not all, of the proposed bills regarding crypto but this… this is a big step up. Senator Gillibrand and Senator Lummis have led the pack in pioneering new legislature that offers greater exploration into topics that regulary get shunned.
Other bills that I have analyzed in the past have lacked depth. This bill however does not. The bill covers all the major categories you'd expect in a comprehensive package.
Brief Notes On Each Section Of The Bill
Title I—Definitions
This section creates definitions for digital assets, virtual currency, payment stablecoins, smart contracts, and similar important terms in this space.
Title II—Responsible Taxation of Digital Assets
This section talks about taxation on transactions for goods, clarifies the definition of ‘broker’, extends the current safe harbors for securities and commodities trading activity made by non-United States persons, specifies that certain decentralized autonomous organizations (DAOs) are business entities for the purposes of the tax code, establishes that digital asset lending agreements are not generally taxable events, requires the IRS to adopt guidance or clarifications on long-standing issues in the digital asset industry, including disposition of forks and airdrops, merchant acceptance of digital assets, digital asset mining and staking, charitable contributions of digital assets and the legal characterization of payment stablecoins as indebtedness, requires the Government Accountability Office (GAO) to conduct an analysis of the potential opportunities and risks of retirement investing in digital assets, declares that digital assets obtained from mining or staking activities do not form part of a taxpayer’s gross income until the disposition of those assets.
Title III—Responsible Securities Innovation
A clear distinction between digital assets that are commodities or securities by examining the rights or powers conveyed to the consumer, giving digital asset companies the ability to determine what their regulatory obligations will be and giving regulators the clarity they need to enforce existing commodities and securities laws.
Title IV—Responsible Commodities Innovation
Lummis-Gillibrand grants the CFTC exclusive spot market jurisdiction over all fungible digital assets which are not securities, including ancillary assets, in addition to the agency’s current jurisdiction over leveraged transactions, similar to the Digital Commodity Exchange Act.
Title V – Responsible Consumer Protection
Requires providers of digital assets to clearly disclose information in customer agreements relating to the product, including asset treatment in bankruptcy, risks of loss, applicable fees, and redemption.
Title VI – Responsible Payments Innovation
Lummis-Gillibrand requires all issuers of payment stablecoins to: (1) maintain high-quality liquid assets valued at 100% of the face value of all outstanding payment stablecoins; (2) provide public disclosures on the assets backing the stablecoin and their value; and (3) have the ability to redeem all outstanding payment stablecoin at par in legal tender. Establishes a detailed, optional process for depository institutions (banks/credit unions) to issue a payment stablecoin.
Title VII – Responsible Banking Innovation
Requires the Federal Reserve Board of Governors to study how distributed ledger technology (DLT) may be used to reduce risk in depository institutions, including through reduced settlement/operational risk and capital requirements.
Title VIII – Responsible Interagency Coordination
Requires Federal financial regulators to provide interpretive guidance on a matter within the jurisdiction of the regulator within 6 months of a request.
Noted Highlights
For Securities
These are some sections I wanted to highlight. I can not stress enough how important the inclusion of a modified version of the Digital Commodity Exchange Act (DCEA) is in this proposed legislation. The DCEA was proposed earlier in the House, making CFTC the primary spot market regulator for crypto. Now, this isn’t the full decentralization everyone wants but it’s a step in the right direction. This proposal now has bipartisan and bicameral support.
This bill codifies the Howey Test. This means a portion of current tokens are now commodities that would be governed by CFTC and not the SEC.
Gary Gensler must be fuming.
Gary Gensler must be capitulating.
Tokens that are "ancillary assets" have reduced SEC reporting requirements. “Ancillary asset” definition is a little flawed, as it excludes all tokens with "voting" rights or "any other financial interest in an entity". This by loose definition could be applied to every token. This will need to be fixed.
Another great proposal with bipartisan and bicameral support is the adoption of the McHenry/Ryan proposal. This proposal fixes the horrendous crypto tax provisions introduced in last year's infrastructure bill which you can read more about here. Take the invasion of personal privacy and some abuse of your amendment rights, which sums up what was previously introduced.
For Decentralization
Sec. 302 is a massive glimmer of hope. "Decentralize" and escape the Howey test if, over the past 12 months, the "primary" value of the token is not derived from the "entrepreneurial or managerial efforts" of the issuer. This is a clear statutory framework for LEGAL decentralization. This means U.S. innovators can actually have room to build the future they see with Web3 and true decentralization. The implications are massive!
For Bitcoin and decentralization maxis, this is a big win! A statutory right to self-custody!
For Stablecoins and Payments
Payments Depository institutions - Banks - now have the authority to issue their own stablecoins. This is great news and an efficient step to finally wiping out the current archaic payments system. Sec. 603 also explicitly defines the Digital Yuan as a threat. China your response?
Don’t be surprised with much more stringent stablecoin regulation thanks to the $UST collapse. Unfortunately, stablecoins are tied too tightly to national security while the CBDC is still being talked about (unfortunately). This section will most likely be debated more as the months go on.
For DAO’s
The bill defines "DAO" in the Internal Revenue Code as a "properly incorporated or organized" organization. It, however, does not mandate incorporation nor give an obvious tax carrot to do so, meaning most DAOs will likely stay entity-less. Rejoice.
The Sandbox
The Sandbox is a huge win for financial privacy, innovation, and overall liberty. Under Title VIII of the bill, if a company is "operating in an existing state financial sandbox" and "under specific consumer protection and activities restrictions", then regulatory burdens are reduced exponentially. This is the yellow brick road for innovation we have been waiting for. Senator Lummis and Senator Gillibrand literally just showed us the path and gave us the low-rider set to cruise.
And Some
There is also an abundance of clarity on other smaller issues that directly encourages responsible innovation while giving more than enough room for any firm in Web3 to grow without fear of Gensler’s idiocy. A de minimis tax exemption; SEC custody requirements; fair treatment for crypto banking; there really is a lot to rejoice in here. Senator Lummis and Senator Gillibrand are clearly making a point by giving more than enough runway for the U.S. to stay a global leader in this space. It would be one of the more foolish plays not fully embracing this bill and Web3, especially after China outright banned even thinking about anything crypto.
What is even greater to see is two individuals on both sides of the political aisle working together on sensible policy. In today’s political climate, that is something to applaud in and of itself.
Written by Theo White