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The US’ digital asset world may be entering new uncharted regulatory territory, as lawmakers seek clarity on jurisdiction, stablecoins, banking, tax, interagency coordination and many other areas.
US senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) have introduced a new bipartisan bill that aims to create a complete regulatory framework for digital assets.
The Responsible Financial Innovation Act, submitted on June 7, seeks to promote flexibility, transparency and robust consumer protections, while integrating digital assets into existing law.
Lummis and Gillibrand have said the bill is the “most substantial and comprehensive” bipartisan attempt to date to provide certainty and clarity to the industry at a federal level.
“Digital assets, blockchain technology and cryptocurrencies have experienced tremendous growth in the past few years, and offer substantial potential benefits if harnessed correctly,” said Gillibrand.
“The act will establish a regulatory framework that spurs innovation, develops clear standards, defines appropriate jurisdictional boundaries and protects consumers.”
Lummis and Gillibrand first announced that they were working on the bipartisan bill in March this year, and both noted that their respective committee assignments had equipped them for the task.
Gillibrand serves on the Agriculture Committee, which has oversight over the Commodity Futures Trading Commission (CFTC), while Lummis serves on the Banking Committee, which has oversight over the US Securities and Exchange Commission (SEC).
The CTFC regulates commodities markets, while the SEC regulates securities.
Digital assets: securities or commodities?
One of the main elements of the bill sets standards for determining which digital assets are designated commodities under law and which are securities.
This distinction, which dove-tails into separate regulatory paths, is based on the purpose of the digital asset in question and the rights or powers it conveys to the consumer.
In effect, this will allow digital asset companies to determine what regulatory obligations they will face in advance, and will give regulators added clarity when enforcing existing securities and commodities trading laws.
Specifically, the bill assigns regulatory authority over digital asset spot markets to the CFTC.
This provision is based on the logic that most digital assets are more similar to commodities than they are to securities and should therefore be regulated as such.
Bitcoin and ethereum, for example, are two digital assets that would meet the definition of a commodity as per the bill.
Together, these two assets make up more than half of the total market capitalisation of all cryptocurrencies, including stablecoins.
Bobby Zagotta, CEO of crypto exchange Bitstamp, praised the bill for its division of jurisdiction between the CTFC and the SEC.
“The bill illuminates a path forward in the areas of uncertainty that are slowing innovation — such as securities and non-securities, stablecoins and digital asset market regulation,” he said.
“I’m greatly encouraged by its potential to help cement American competitiveness in this new global marketplace."
The bill would also impose disclosure requirements on digital asset service providers to ensure that consumers understand the product they are buying and can make informed decisions when engaging with digital assets.
This provision extends to disclosures on the rights and risks associated with digital asset transactions, up to and including source code version changes and digital asset lending.
For companies that raise money through the sale of digital assets, the bill would also impose a separate set of disclosures that must be made to the SEC.
Lewis Cohen, co-founder of US blockchain law firm DLx, said that digital asset companies would benefit from the improved disclosure framework.
“Title III of the act requires companies raising funds through sales of digital assets to provide the SEC with the information needed to allow thorough due diligence,” he said. “This addresses one of the most vexing issues currently facing the digital asset space.”
However, not all quarters have been pleased with the contents of the bill. Dennis Kelleher, CEO of non-profit regulatory advocacy group Better Markets, said he believes the bill makes too many concessions to the demands of the crypto-industry.
“The bill appears to be designed to disarm the public by making them think crypto will be properly regulated, while the industry and the insiders know that is simply not true,” he said in a statement.
“The tell is that the bill gives the industry what it wants most: the CFTC as its primary regulator, even though it exists to police markets where physical producers and purchasers of commodities hedge their price risk to facilitate the delivery of everyday goods to the American people.
“Of course, crypto is nothing like corn or hogs or oil, but the industry wants the CFTC as its regulator because it is the smallest financial regulator with the smallest budget.”
Stable rules for stablecoins
The bill would also create new stablecoin requirements for issuers and markets, which are aimed at protecting consumers and promoting faster, more secure payments.
For example, the bill would establish detailed disclosure requirements for 100 percent of the reserves that support asset-backed stablecoins, including disclosure requirements on asset type.
Lummis and Gillibrand said that these provisions will guarantee that stablecoin holders can always redeem their tokens for the equivalent dollar value, preventing a TerraUSD style run on the collateral.
Japan’s new stablecoin law, reported by VIXIO earlier this week, contained a similar redemption guarantee.
For banks and credit institutions that wish to issue stablecoins, the bill offers a detailed, optional framework as guidance.
It also authorises a special depository institution charter under both state law and the National Bank Act for payment stablecoin issuance, with tailored capital requirements and holding company supervision.
However, the bill does not require that all payment stablecoin issuers are depository institutions.
For this reason, among others, the bill has been seen by some as soft on stablecoin issuers, which, as TerraUSD has shown, can be a risky business.
The American Bankers Association (ABA), for example, criticised the bill for applying less restrictions to digital asset firms than to banks.
“The act would effectively create a parallel supervisory and regulatory structure that holds non-bank firms to lesser standards than banks, and therefore offers their customers and our financial system fewer protections,” the ABA said in a statement.
“We believe [Federal Reserve Chairman Jerome] Powell’s principle of ‘like activity, like regulation’ should guide this debate, and we look forward to sharing our perspective as the legislative process plays out.”
In contrast, Coinbase head of US policy Kara Calvert described the bill’s stablecoin provisions as “comprehensive and detailed”, noting that they promote both consumer protection and innovation.
Energy, cybersecurity and CBDC
The remainder of the bill offers provisions related to energy, cybersecurity, tax, savings and pensions, and central bank digital currency (CBDC).
The bill directs the Federal Energy Regulatory Commission to analyse and report on energy consumption in the digital assets industry.
It also directs the CFTC and the SEC to study and report on the development of a self-regulatory organisation and develop a proposal for its creation.
The bill’s cybersecurity provisions direct the CFTC and SEC to consult with the Treasury and National Institute of Standards and Technology to develop principles-based guidance relating to cybersecurity for digital asset intermediaries.
The bill also focuses on learning more about how US’ rivals, such as Russia and China, participate in digital asset markets, including for purposes such as sanctions avoidance, money laundering and terrorist financing offences.
Finally, the bill directs the Office of Management and Budget (OMB), the Cybersecurity and Infrastructure Security Agency, the Director of National Intelligence and the Defense Department to conduct an information security study of the digital yuan, China’s CBDC.
Highlighting the growth of China’s CBDC, the bill notes that it is important for the US to understand the national security implications of the digital yuan and China’s intention to promote its adoption internationally.
