Under a major new bill introduced by Senators Carol Lummis, Kirsten Gillibrand, the CFTC would take over as crypto’s primary regulator.
Under a bipartisan bill introduced Tuesday by Senator Cynthia Lummis (R-Wy), and Kirsten Gillibrand, the Security and Exchange Commission would lose the authority it has to regulate the crypto market.
The Responsible Financial Innovation Act is the largest piece of crypto legislation to date. It introduces a host of other important measures, including the elimination of the requirement to report crypto gains less than $200 to the IRS.
It is unlikely that the bill will be passed in the current Congress. It is however expected to gain momentum in 2023 after the November midterm elections. This will allow it to shape future crypto policy.
So long SEC, hello CFTC
The language that will end the SEC’s control over large parts of the crypto industry is the most important provision in the bill. It comes after years-long complaints about the lack of clarity regarding whether a token such as Ethereum is security. This designation would mean that the token must be registered with SEC.
The bill proposes to replace the SEC by giving authority over many tokens an additional agency, the Commodity Futures Trading Commission (which oversees commodity trading). The bill’s summary was circulated by Senators Lummis, Gillibrand. It states that the CFTC has exclusive spot market jurisdiction over all fungible assets that are not securities.
Key is the term “ancillary assets”, which would be added in to the Securities Exchange Act of 1934. The bill summary states that ancillary assets can be described as those which are not completely decentralized (like Bitcoin), but do not grant rights to profits or other financial interests to a business entity.
People familiar with the bill’s drafting said that this would apply to top-tier blockchain projects such as Cardano or Solana. It also applies to the top 200 assets of CoinMarketCap which ranks cryptocurrencies according to market capital. Projects would need to provide periodic disclosures regarding matters such as the number of tokens issued to be eligible for the “ancillary assets” definition. This is a process that aims to increase transparency.
Another notable passage in the bill’s summary explains that the bill is intended to codify “The Howey test”, a Supreme Court doctrine that defines when an asset can be considered a security. People familiar with the bill’s writing, who asked not to be identified, said that the Howey test clarifies that cryptocurrencies are not securities and that the SEC’s definition of them is wrong.
They were an implicit rebuke to Gary Gensler the current chairman of the SEC, who is deeply unpopular within the crypto community and is accused by former SEC staffers of using the agency to further his political ambitions.
It is unclear whether the Howey test language is legal. Or if, as many crypto lawyers suggest, most cryptocurrencies can be considered securities.
The bill contains a provision that allows the SEC to challenge federal court designations regarding whether a particular cryptocurrency is a security.
Final note: If the bill is passed and the responsibility for crypto sector shifts primarily towards the CFTC then the agency would be given a significant cash infusion, funded primarily by crypto industry, to continue its new major responsibilities.
What is stablecoin, crypto’s environmental impact and what it means?
Lummis-Gillibrand’s bill, which is 69 pages long, also proposes a new way to regulate stablecoins. This has been a hot topic since the dramatic collapse of Terra, a stablecoin project. The Terra project relied on financial engineering gimmicks in order to keep the stablecoin’s price at $1. This led to the collapse that wiped out billions of dollars.
Lummis-Gillibrand would require stablecoin issuers maintain a 100% reserve and allow stablecoin owners to exchange their coins for an equal dollar amount at any time. It would allow banks and other institutions to issue stablecoins and make payments with them.
Another issue that is hotly debated in the bill is crypto’s effect on the environment. Critics claim that Bitcoin mining is a significant contributor to climate change, as they require a lot of energy. The bill does not propose to limit mining. Instead, it calls on the Federal Energy Regulatory Commission (FEC) to study crypto’s impact and the role of renewables within the industry.
The bill also addresses other major crypto issues, such as the use of cryptocurrency in retirement accounts and the creation a crypto industry group that promotes certain types of regulation.
This is all largely irrelevant if the bill is not passed by Congress, which is what happened to previous crypto bills.
The United States is currently focusing on broad concerns such as the war in Ukraine or gun safety laws. According to one Washington observer, crypto issues are more complicated and niche than other issues. This is why many people don’t expect the Lummis Gillibrand bill will be passed any time soon.
People familiar with the bill’s writing acknowledged this fact but said that the bill would still move in a piecemeal fashion through different committees and be ready for passage in 2023. They also stated that the final bill would contain significant revisions to the existing version.