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Senators unveil sweeping crypto regulation plan that would place ‘ancillary assets’ under the CFTC

June 7, 2022, 1:11 PM UTC

A wide-reaching, bipartisan crypto bill finally emerged Tuesday from U.S. Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.), who are seeking to extend a comprehensive set of regulations across digital assets in the U.S. and have given industry lobbyists something meaty to debate.

Their bill would liberate small-scale purchases of goods and services from the mire of tax implications by making it tax-free on transactions less than $200 – potentially clearing a path for a cryptocurrency that acts more like a currency. And, as expected, the legislation would grant new powers and a commanding presence to the Commodity Futures Trading Commission.

The far-reaching legislation attempts to tackle the most significant questions hanging over digital assets. It would set new federal law for stablecoins, taxes on small-scale payments and the jurisdictions of regulators—answering the uncertainties that keep the fledgling financial sector from maturing.

However, the effort from Lummis and Gillibrand is seen in Washington as a starting point for a dialogue that won’t lead anywhere significant before next year. It joins several previous bills that mostly sought to bite off narrow pieces of the cryptocurrency landscape, such as the recent push for stablecoin rules by Senator Pat Toomey (R-Pa.). It even borrows from some of that work.

Still, the effort would likely have to split into several pieces in 2023 as it winds through congressional committees in the next session. With Lummis on the Senate Banking Committee that oversees the Securities and Exchange Commission and Gillibrand holding a spot on the Agriculture Committee that watches the commodities and the CFTC, the lawmakers are well placed to help shepherd key portions of the legislation.

Their so-called 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,” in the words of Lummis.

These are some of the main features of what Gillibrand described as a “landmark bill” that “will provide clarity to both industry and regulators, while also maintaining the flexibility to account for the ongoing evolution of the digital assets market”:

  • It would define the terrain between crypto securities and commodities, allowing token issuers to know beforehand what they’re launching based on the “purpose of the asset and the rights or powers it conveys the consumer.” The market envisioned in the bill is dominated by commodities, including most of the big names in crypto, such as Bitcoin, Ethereum and dozens of the other tokens with significant market share that would fall into a definition as “ancillary assets” overseen by the CFTC.
  • The lawmakers would give the Commodity Futures Trading Commission authority over the spot markets in crypto commodities, as sought by agency chief Rostin Behnam. That would carve out a key new power for the federal watchdog that doesn’t now have much reach into cash markets.
  • It also gives “needed legal clarity” in how to handle customer holdings after the recent furor over customers’ tokens getting roped in with an exchange’s assets in the event the company goes bankrupt – a worry that erupted after Coinbase (COIN) suggested it as a possibility in a recent Securities and Exchange Commission filing. The Biden administration has signaled it wants better custody arrangements in any crypto bills moving through Congress.
  • The Lummis-Gillibrand effort also adopts language from a bill last year from Rep. Patrick Henry and others that sought to clarify the meaning of a crypto broker, especially hoping to protect wallet providers, software developers and others from being snagged by certain tax reporting requirements.
  • The bill doesn’t automatically set up the self-regulatory organization (SRO) that many in the industry have lobbied for, but it calls for a study from the SEC and CFTC and a proposal for starting one.
  • Crypto operations watched by the CFTC would – under this legislation – have to start paying fees to fund the agency, akin to the model that now supports the SEC.
  • The senators also suggest an industry “sandbox” in which regulators let crypto firms test new products on a limited scale and duration.
  • In light of the recent, dramatic collapse of TerraUSD (UST), one closely examined aspect of the bill will be its move toward “100% reserve, asset type and detailed disclosure requirements for all payment stablecoin issuers.” There would be a new framework for banks and credit unions to issue stablecoins, but issuers wouldn’t have to become depository institutions. The lawmakers insist that “existing stablecoin issuers and new entrants into the market have an adequate opportunity to compete with existing banks and credit unions.”
  • The bill also requires certain disclosures to the SEC from companies raising funds through digital asset sales. The approach would ensure “that market participants and our securities regulatory community receive detailed and accurate disclosures about those digital assets that are widely traded, but in a manner that encourages innovation,” said Lewis Cohen, co-founder of DLx Law.

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