BitOoda Regulatory Analysis, 6/7/22 — Lummis-Gillibrand Bill: Promising Substance, Uncertain Political Future

After months of discussion with government and industry stakeholders, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) today officially introduced the Responsible Financial Innovation Act, a high-profile bipartisan effort to propose a comprehensive U.S. regulatory framework for digital assets.

It is a far-reaching legislative effort at a time when the two major executive branch crypto regulators — SEC and CFTC — are engaged in an increasingly active dialogue over which agency has greater jurisdiction over crypto. SEC Chair Gensler is attempting to expand his agency’s authorities by arguing that most digital assets and platforms fall under the SEC, while the CFTC is increasingly emphasizing that they already have the jurisdiction to assert themselves in the space. The draft bill was released approximately three months after the President’s Executive Order calling for “responsible” regulation of digital assets.

Among the most important issues tackled by the bill are:

• Designating the CFTC as the primary regulator for crypto spot markets and futures (in addition to its existing oversight of the derivatives market), stating that “most digital assets are much more similar to commodities than securities” and defining most tokens as “ancillary assets”.

• Confirming that the SEC is the primary regulator for digital asset securities, which would be clarified to mean assets being offered to fund a company in the same way stocks are offered to fund companies, i.e. an investment contract consistent with the Howey Test.

• Clarifying that crypto miners would not be classified — or regulated the same way — as broker dealers, amending a controversial provision in last year’s Infrastructure Bill.

• Defining a common set of disclosure requirements for digital asset service providers.

• Addressing digital asset tax policy by making transactions of $200 or less tax-free.

• Introducing a new stablecoin framework for bank and non-bank issuers.

• Directing a number of follow-on studies, including on the creation of a crypto SRO, CBDCs, and digital asset energy consumption.

This bill, in our assessment, represents the most comprehensive treatment of digital asset regulation yet to be introduced — from that perspective, it is the most promising legislative effort we have seen to date. It also is a noble attempt to address the most vexing regulatory questions facing the industry today, particularly token classification and agency jurisdictional boundaries.

That said, we must temper our enthusiasm for the bill with the reality that it faces an uncertain — if not uphill — political path moving forward. First, the bill will need to pass through four Senate committees (banking, agriculture, intelligence and financial services) before making it to the Senate floor. Second, if the bill is approved by the Senate, it would then head to the Democrat-controlled House; although the bill is a bipartisan effort, Democrats are deeply divided in terms of their positions on how the U.S. should treat crypto from a regulatory perspective, risking further delays and setbacks. Third, the bill’s sheer size and complexity could make consensus on the whole bill unworkable, forcing lawmakers to break it up into smaller components for individual consideration.

While the bill, in our view, would be a tremendous step forward for the digital asset industry while balancing responsible innovation and consumer protection, we are remaining cautiously optimistic until we see real progress with its political path forward.