A bipartisan measure was announced Tuesday by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand would strip the SEC of power over the top 200 cryptocurrencies (D-NY).
The Responsible Financial Innovation Act is the most comprehensive cryptocurrency law ever introduced. Eliminates the requirement to report cryptocurrency earnings of $200 or less to the IRS.
It is unlikely that this Congress will approve the measure. The November midterm elections should give it a new boost in 2023 and shape future crypto legislation.
The CFTC replaces the SEC
The proposed wording to end the SEC’s jurisdiction over most cryptocurrency business is one of the most significant sections of the bill. It comes after years of concern over a lack of clarity about whether a digital token like Ethereum is a security, which would need to be registered with the SEC.
The law would replace the SEC with the Commodity Futures Trading Commission, which controls commodity trading. Senators Lummis and Gillibrand’s measure “gives the CFTC exclusive spot market authority over all fungible digital assets other than securities, including ancillary assets.”
The Securities Exchange Act of 1934 would add “ancillary assets.” According to the summary of the bill, ancillary assets are not fully decentralized (like Bitcoin) and do not constitute financial rights in a corporate organization.
In a conference call with reporters, people familiar with the move said this definition would apply to popular blockchain projects like Cardano and Solana and to the top 200 assets on CoinMarketCap. To qualify as an “ancillary asset,” projects must make regular statements about things like how many tokens have been distributed. This is intended to promote transparency.
In another paragraph, the bill’s description notes that it will codify the “Howey test,” a 1940s Supreme Court precedent defining a value. According to those involved in the drafting of the bill, the Howey test proves that cryptocurrencies are not securities and that the SEC’s opinion is wrong.
His comments were an implicit criticism of SEC Chairman Gary Gensler, who is unpopular in the crypto world and accused of manipulating the agency to further his political goals.
It is not known if the wording of the Howey test is legal or if most cryptocurrencies are securities based on the test, as several crypto lawyers have indicated.
The law allows the SEC to dispute in federal court whether a cryptocurrency is a security.
If the move goes through and authority over the cryptocurrency sector passes to the CFTC, the agency would gain a huge influx of money from the cryptocurrency business to carry out its new tasks.
Stablecoins, the influence of cryptocurrencies and the future
The 69-page Lummis-Gillibrand bill suggests a new strategy for regulating stablecoins, a hot topic since the surprising collapse of Terra in May. The Terra project used financial engineering tricks to preserve the stablecoin’s $1 peg, which contributed to its failure.
Lummis-Gillibrand would require stablecoin issuers to hold a 100% reserve and ensure stablecoin owners could always exchange coins for dollars. It would also allow banks and other entities to use stablecoins for payments.
The measure refers to the environmental impact of cryptocurrencies. Critics say energy-intensive Bitcoin mining contributes to climate change. Instead of limiting mining, the measure asks the FERC to study the effect of crypto and the role of renewable energy in the business.
The move also contemplates the use of crypto in retirement savings and the creation of a crypto industry organization to encourage regulation.
All of this is irrelevant if the measure fails in Congress, as previous crypto bills have.
US politicians are focusing on the Ukraine war and gun safety regulation. An observer from Washington called cryptography “complex and specialized.” As such, few expect Lummis-Gillibrand to pass anytime soon.
Those familiar with the bill’s development acknowledged this but predicted it would be passed piecemeal in 2023. They stressed that any final version of the measure will be significantly revised.
