In a big win for the crypto industry, a pair of senators proposed bipartisan legislation that would drastically reduce the authority of the Securities and Exchange Commission (SEC), grant tax exemptions that would make it far easier to use cryptocurrencies for small, day-to-day payments, and set ground rules for stablecoins.
The Responsible Financial Innovation Act, introduced on Tuesday (June 7), is a piece of bipartisan legislation by Sen. Cynthia Lummis, R-Wyo., and Sen. Kirsten Gillibrand, D-N.Y., that seeks to create a broad and all-inclusive regulatory and legal framework for cryptocurrencies, stablecoins and the decentralized finance (DeFi) market, including tax policy.
Crucially, it would also create a common set of definitions making clear what digital assets, virtual currencies, stablecoins, smart contracts and other key part of the new technology are. It would also create an industry self-regulatory body.
From a payments perspective, two feature stand out. First, the bill would exclude crypto purchases under $200 from having to report capital gains to the Internal Revenue Service (IRS) — a complex task that is currently required for any purchase, even a cup of coffee.
Second, it would require stablecoins to be 100% backed by fiat currency and a limited-but-undetermined set of highly liquid investments such as treasuries.
“The Responsible Financial Innovation Act creates regulatory clarity for agencies charged with supervising digital asset markets, provides a strong, tailored regulatory framework for stablecoins, and integrates digital assets into our existing tax and banking laws,” said Lummis, who is a strong supporter of cryptocurrencies and long-time bitcoin investor.
It also gets into central bank digital currencies (CBDCs) by calling for a study of China’s digital yuan by security and defense agencies. As CBDCs “are growing in prevalence” the release said, “it’s important that the U.S. understands the national security implications of the digital yuan and China’s intention to promote its adoption internationally.”
It does not, however, get into the question of whether the U.S. should issue a CBDC of its own — a digital dollar.
Not This Year
While highly anticipated, it is very unlikely the bill will not become law this year. Aside from the complexity of the task, and the numerous government departments involved, President Joe Biden’s March 10 executive order requiring all government agencies to come up with a single joint proposal for this type of broad regulatory framework doesn’t anticipate a proposal until September. Additionally, this is an election year that is expected to be particularly divisive, making it clear that crypto regulation will almost certainly be put in place no sooner than 2023.
That said, the 69-page bill is likely to set the tone for the discussion among federal agencies, including the Treasury Department, the SEC and the Department of Agriculture’s Commodity Futures Trading Commission (CFTC), which have been engaged in a power struggle over which of them will have oversight of crypto, as well as the IRS and Justice Department, among others.
None of this will upset the crypto industry, which is getting almost everything it wanted.
Christmas Time for Crypto
The biggest win for crypto is the bill granting a substantial degree of control to the CFTC at the expense of the SEC, which under Chairman Gary Gensler has claimed jurisdiction over virtually all cryptocurrencies, saying they are investment contracts.
While the bill does not exclude the SEC, it would “assign regulatory authority over digital asset spot markets to the CFTC,” Gillibrand said in a post on Medium.
“Understanding that most digital assets are more similar to commodities than securities, the bill gives the CFTC clear authority over virtual currency spot markets,” she said. “Digital assets that meet the definition of a commodity, such as bitcoin or ether, which comprise more than half of digital asset market capitalization, will be regulated by the CFTC.”
That leaves more than a little wiggle room for the SEC to assert control — it has unofficially accepted that bitcoin and ether are not securities for several years — but in practice will make it far easier for crypto developers and issuers to follow guidelines that will make their tokens fall under the CFTC’s purview.
The bill provides for the creation of a regulatory sandbox that requires “federal and state regulators collaborate with financial technology companies to permit them to introduce innovative products into the market on a limited basis, allowing regulators to become more familiar with financial technology products in a controlled environment,” Gillibrand said.
In addition, the bill calls for a study on the suitability of cryptocurrencies investments in 401(k) retirement plans — something the Department of Labor, which controls them, has come out strongly against.
By excluding crypto purchases made with cryptocurrencies from capital gains, the bill effectively makes day-to-day purchases possible. The problem is, under the current regulations — or rather, lack of regulation — for every purchase, no matter how small, you have to figure when and at what price you bought the crypto used in that specific transaction and then file a capital gains or loss report.
The Lummis-Gillibrand bill patches that hole and also clarifies tax treatment of various actors with the space, including that crypto miners are not brokers, the subject of a lobbying effort that saw 99 senators try to change the provision in a way that required 100. That was a seminal moment for crypto, showing just how much interest there was on Capitol Hill.
It would also declare that crypto lending products are not securities — an issue that came up when the SEC warned Coinbase not to create a lending product, and worked with state regulators to fine BlockFi $100 million over its offerings.
In addition to defining terms that will clarify regulatory requirements for crypto companies, the bill calls for the creation of cybersecurity standards. It also calls for a study on the environmental costs of mining bitcoin and other cryptocurrencies.
It will also create regulations around decentralized finance, or DeFi, declaring that “certain decentralized autonomous organizations (DAOs) are business entities for the purposes of the tax code,” be based in a single jurisdiction and register appropriately as a LLC, corporation, partnership, foundation, cooperative or similar organization.
The bill has a substantial stablecoin section, including the requirement that they are backed 100% by fiat currency reserves as well as a limited and well-defined selection of highly liquid assets.
That issue has gained momentum after the $45 billion collapse of the terraUSD stablecoin last month, underlining fears that stablecoin runs could be quicker and harder to control than bank runs, and would ban so-called algorithmic stablecoins whose 1-1 dollar peg is supported by arbitrage and other mechanisms rather than a currency reserve.
“Payment stablecoins are increasing in use and adoption, and when done correctly, could provide consumers with a faster way of making payments,” Gillibrand said. “The 100 percent reserve model guarantees that a stablecoin holder can always redeem the stablecoin with the issuer in exchange for the equivalent dollar value, which maintains its stable value and protects consumers from many of the potential risks in the stablecoin markets today.”
The bill would not limit stablecoin issuance to federal banks, as the Biden administration called for, instead allowing state-chartered depository institutions to issue them. These would be “neither a commodity, nor a security,” a description of the bill said.
“The bill also sets forth a detailed, optional framework for all banks and credit unions to issue payment stablecoins,” the senators said. “The bill also authorizes 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.”
It does not, they added, require all payment stablecoin issuers to become depository institutions.