The Security and Exchange Commission would lose its authority to regulate a broad swath of the crypto market, including the 200 most valuable cryptocurrencies, under a bipartisan bill unveiled on Tuesday by Sen. Cynthia Lummis (R-Wy) and Kirsten Gillibrand (D-NY).
The proposed bill, titled the Responsible Financial Innovation Act, is the most comprehensive piece of crypto legislation proposed to date and introduces a raft of other significant measures, including a provision that eliminates the obligation to report crypto gains of $200 or less to the IRS.
The bill stands almost no chance of passing in the current Congress. But it is expected to gain new momentum in 2023 following the November mid-term elections, and to frame the contours of future crypto policy.
So long SEC, hello CFTC
The proposed language to end the SEC’s jurisdiction over much of the crypto industry is one of the most significant provisions in the bill and comes after years of complaints about a lack of clarity as to whether a digital token like Ethereum is a security—a designation that would require the token to be registered with the SEC.
In place of the SEC, the bill proposes to grant authority over many tokens to another agency, the Commodity Futures Trading Commission, which oversees commodity trading. A summary of the bill circulated by Senators Lummis and Gillibrand explains that it “grants the CFTC exclusive spot market jurisdiction over all fungible digital assets which are not securities, including ancillary assets.”
The term “ancillary assets,” which would be added to the Securities Exchange Act of 1934, is key. According to the bill summary, ancillary assets are those which are not fully decentralized (like Bitcoin) but also do not create rights to profits or other financial interests in a business entity.
On a call with reporters, people familiar with the drafting of the bill said this definition would apply to popular blockchain projects like Cardano and Solana, and to the top 200 assets on CoinMarketCap, a website that ranks cryptocurrencies by market cap. To be eligible for the “ancillary asset” definition, however, projects would have to file periodic disclosures related to matters such as how many tokens had been issued—a process intended to increase transparency.
In another notable passage, the summary of the bill explains that it is intended to codify the “Howey test,” a Supreme Court doctrine from the 1940s that explains when an asset is a security. According to the people familiar with the bill’s drafting—who asked not to be identified by name—the Howey test makes clear that cryptocurrencies are not securities, and that the SEC’s interpretation, which says they are, is incorrect.
Their remarks came as an implicit rebuke of the SEC’s current chairman, Gary Gensler, who is deeply unpopular in the crypto community, and who former SEC staffers claim is using the agency as a vehicle to further his political ambitions.
It’s unclear if the language concerning the Howey test is legally correct, or if—as many crypto lawyers have suggested—that most cryptocurrencies are securities under the test.
In any case, the bill does include a provision that permits the SEC to challenge designations concerning whether a given cryptocurrency is a security in federal court.
Finally, if the bill passes and responsibility for the crypto sector shifts primarily to the CFTC, the agency would receive a major cash infusion—funded primarily by the crypto industry itself—to carry on its major new responsibilities.
Stablecoins, crypto’s environmental impact, and what comes
The 69-page Lummis-Gillibrand bill also proposes a new approach to regulating stablecoins—a hot button issue of late given the spectacular collapse of a stablecoin project called Terra in May. That collapse, which wiped out tens of billions of dollars, came about in part because the Terra project relied on financial engineering gimmicks to maintain the stablecoin’s peg to $1.
If Lummis-Gillibrand becomes law, it would oblige stablecoin issuers to maintain a 100% reserve, and ensure that stablecoin owners could exchange the coins for an equivalent dollar amount at all times. It would also clear a regulatory path for banks and others to issue and use stablecoins for payments.
The bill also addresses another hot button issue, namely crypto’s impact on the environment. According to critics, activities like Bitcoin mining are a major contributor to climate change because they are energy-intensive. Rather than impose limits on mining, however, the bill calls for the Federal Energy Regulatory Commission to conduct studies to explore crypto’s impact, as well as the role of renewables in the industry.
Other major crypto issues that the bill addresses include the use of crypto in retirement accounts, and the creation of a crypto industry group to promote certain types of regulation.
All of this is largely moot, however, if the bill does not advance in Congress—which is the fate of past crypto bills.
Currently, U.S. lawmakers are focused on issues of broad concern such as the war in Ukraine and gun safety laws. By contrast, crypto issues are “complicated and niche,” according to one Washington observer. This is one big reason why few expect the Lummis-Gillibrand bill to be passed anytime soon.
Those familiar with the bill’s drafting acknowledged this reality but suggested that the bill will nonetheless advance in a piecemeal fashion through various committees, and be ready to pass in 2023. They added that any final version of the bill will contain considerable revisions to the current version.
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