Lummis and Gillibrand want to empower CFTC, treat digital assets like commodities

US Capitol Building in Washington, DC

Liu Jie | Xinhua News Agency | Getty Images

As excited as Wall Street and Main Street were to have cryptocurrency as a new investment idea and store of value, the speed with which cryptocurrencies entered major US markets caused proportionate angst for US regulators, who were equipped only with decades-old securities laws to police. an industry that many still call the financial “Wild West”.

But after months of research, industry consultation and bipartisan teamwork, Sens. Kirsten Gillibrand and Cynthia Lummis said on Tuesday they are ready to debut the first major attempt at putting barriers around the nascent industry.

His bill, entitled the Responsible Financial Innovation Act, amounts to a regulatory review that would classify the vast majority of digital assets as commodities like wheat, oil or steel. As such, the bipartisan legislation would also leave most of the oversight responsibility to the Commodity Futures Trading Commission rather than the Securities and Exchange Commission, as some had hoped.

Gillibrand, a New York Democrat on the Senate Agriculture Committee, and Lummis, a first-term Republican from Wyoming on the Banking Committee, said the legislation is the culmination of months of collaboration in the House and Senate and represents a first step. critical. attempt to structure digital asset markets with long-awaited legal definitions.

Its offices praised the bill as “landmark bipartisan legislation that will create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protection, while integrating digital assets into existing law.”

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The cornerstone of the legislation is how it defines the vast number of digital assets available to US investors and consumers.

With few exceptions, the bill designates digital currencies as “ancillary assets” or intangible and fungible assets that are offered or sold in conjunction with the purchase and sale of a security.

Gillibrand and Lummis’ team explained that their law treats all digital assets as “ancillary” unless they behave like a security a corporation would issue to entice investors to build a pool of capital.

Cryptocurrencies and other digital currencies will not be treated like traditional bonds under SEC scrutiny unless they give the holder privileges enjoyed by corporate investors, such as dividends, liquidation rights or a financial interest in the issuer, the offices told reporters.

They added that the bill is the product of months of discussion with other senators, including Republican minority leader Mitch McConnell and Pat Toomey, as well as Democrats like Ron Wyden.

Representative Ro Khanna, a Democrat representing Silicon Valley, also opined.

“My home state of Wyoming has gone to great lengths to lead the nation in regulating digital assets, and I want to bring that success to the federal level,” Lummis said in a press release. “As this industry continues to grow, it is critical that Congress carefully craft legislation that promotes innovation while protecting consumers from bad actors.”

“The Lummis-Gillibrand framework will provide clarity to both the industry and regulators, while also maintaining the flexibility to account for the ongoing evolution of the digital asset market,” Gillibrand added in the same statement.

The CFTC and SEC together regulate wide swaths of the US market and act as two powerful watchdogs on Wall Street. The former oversees the buying and selling of raw materials such as corn, coffee, gold and oil, while the latter polices companies, executives and bonds that seek to raise capital from the public.

While it was up to Congress to decide how government agencies police US markets, the SEC and its chairman, Gary Gensler, have led the public crusade in support of stricter encryption rules for more than a year.

“Currently, we just don’t have enough protection for investors in cryptocurrency finance, issuance, trading or lending,” Gensler told lawmakers in September. “Frankly, at this point, it’s more like the Wild West or the old ‘buyer beware’ world that existed before securities laws were enacted.”

Representatives for Lummis and Gillibrand said they worked with the SEC on their plan and spent weeks trying to remedy concerns expressed by the regulator’s lawyers that the legislation would cede too much power.

They also said the fees charged to issuers of digital assets would play an important role in increasing the CFTC’s budget to take on what is expected to be a deluge of regulatory oversight.

While Gillibrand and Lummis have experience working with the CFTC and SEC, respectively, it was unclear as of Tuesday morning what each institution thinks of the new legislation. Neither the CFTC nor the SEC immediately responded to CNBC’s requests for comment.

The contribution of both agencies is critical to the legal debate in the US over how to define cryptocurrencies and other digital assets.

The Gillibrand and Lummis bill, for example, defines a “digital asset” as a native electronic asset that confers economic or proprietary access rights or powers and includes virtual currency and payment stablecoins.

It later defines virtual currency as a digital asset used “primarily” as a medium of exchange, unit of account or store of value and not backed by an underlying financial asset.

These definitions, while often laden with legal jargon, have a profound impact on how digital currencies are policed ​​and are therefore of great interest to the most powerful players in the growing world of cryptocurrency lobbying.

The industry has hired more than 200 employees and staff from the White House, Congress, Federal Reserve and political campaigns, according to the Tech Transparency Project. Meanwhile, cryptocurrency executives have contributed more than $30 million to federal candidates and campaigns since the start of the 2020 election cycle, according to documents held by the Federal Election Commission.

Both Lummis and Gillibrand want to work with their peers to develop their respective states into blockchain and cryptocurrency havens.

At the Empire State, New York City Mayor Eric Adams invested his first salaries in bitcoin and ether, while Representative Ritchie Torres, a Democrat representing the Bronx, said in March that his city “must and must embrace cryptocurrency.” if you want to remain the financial capital of the world.”

Meanwhile, Wyoming edited its laws in 2019 to create a new type of bank letter called a special purpose depository institution to accommodate cryptocurrency startups and trading platforms and remains on an aggressive path to diversify into finance and away from old-school industries like coal and gas.

The team of both senators released key features of the bill in a call with reporters, including certain tax exemptions that would protect stablecoin holders from having to report income changes whenever they make a digital currency purchase.

These disclosures would inform investors of issuers’ experience in developing digital assets, the issuers’ past asset pricing history, anticipated costs, and descriptions of each issuer’s management teams and liabilities.

While officials described the bill as a hodgepodge of contributions from politicians on both sides of the political aisle, they acknowledged that its size and complexity could force lawmakers to split it up and try to pass its components piece by piece.

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