A new draft of the bipartisan Lummis-Gillibrand crypto bill aimed at creating a regulatory framework for the industry will be released in April. It aims to provide the needed regulatory clarity for many crypto projects.
The Responsible Financial Innovation Act, introduced by Wyoming Senator Cynthia Lummis and New York Senator Kirsten Gillibrand, proposes to establish a federal regulatory framework for cryptocurrencies like Bitcoin. This bill can put the U.S. at the forefront of crypto innovation and inclusion if it becomes law.
Regulatory clarity is crucial to enhancing innovation. Too much regulation can stifle entrepreneurship and businesses from coming up with new ways to solve problems. However, an uncertain regulatory environment can be just as bad. It makes it hard for businesses to invest significant resources into potentially illegal ventures.
The regulatory environment for crypto in the U.S. has been challenging, with many innovative companies moving offshore. The issue is partly because U.S. financial markets are regulated by multiple independent agencies. That includes the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), U.S. Treasury Department, and U.S. Federal Reserve. In contrast, other countries have a single agency regulating financial markets. That makes it easier to propose consistent regulations for new asset classes.
The SEC has been aggressive yet unpredictable in its approach to crypto regulation under both the Biden and Trump administrations. The agency’s lack of clear guidance on cryptocurrencies and its use of a vague standard, the Howey test, have made it difficult for entrepreneurs to know whether their ventures comply with securities law.
Dissecting the Bill
The Responsible Financial Innovation Act aims to solve these issues by providing clear legal definitions and regulatory lanes for digital assets. The bill divides the digital asset world into three categories: commodities, securities, and ancillary assets. Ancillary assets refer to crypto tokens that fluctuate in value. But, they do not provide the holder with a financial interest in the issuing company. That includes debt or equity securities.
Under Section 301 of the bill, issuers of ancillary assets must disclose certain information to the SEC. By complying with these requirements, digital asset issuers will be presumed to be a commodity. That falls under the regulation of the CFTC. Section 403 of the bill gives the CFTC exclusive jurisdiction over any digital assets. That includes ancillary assets, other than equity or debt securities.
This division of regulatory authority would put an end to the turf war between the SEC and other federal agencies. This would allow crypto projects to know which regulations to follow and which regulators to engage. This, in turn, would open up enormous financial innovation to American consumers. The latter is currently barred from participating in many digital asset innovations due to the SEC’s unpredictability.
Moreover, the bill requires projects that want to tap into the U.S. market to disclose information about their businesses, financial condition, and plans for protecting consumers in case of bankruptcy. This transparency will weed out fly-by-night crypto projects and reward those with genuine economic utility.
The Responsible Financial Innovation Act also makes an effort to create a regulatory structure around stablecoins. Stablecoins are digital assets pegged in value to a traditional government-issued fiat currency. Stablecoin regulation has become more critical after the collapse of the algorithmic stablecoin TerraUSD.
Stablecoin Regulation & CBDCs
Regulated stablecoins are similar to the 21st-century version of money-market mutual funds. Section 601 of the bill creates a structure for regulated stablecoins, whose sponsors must maintain high-quality liquid assets equal to not less than 100 percent of the face amount of the issued stablecoins. High-quality liquid assets are defined as U.S. currency, Treasury bonds, Federal Reserve balances, and other well-established cash-like instruments.
The US Federal Reserve remains neutral towards CBDCs, as stated in their white paper that presents the pros and cons of a CBDC, without advancing any specific policy outcome. To safeguard citizens’ civil liberties, the Lummis-Gillibrand bill should make it clear that the Fed cannot establish a CBDC without Congress’s explicit approval.
Establishing clear rules for regulated stablecoins would make the Federal Reserve’s dangerous push for a central bank digital currency (CBDC) unnecessary. The Fed’s CBDC proposal would put the central bank in direct competition with private financial institutions. That could lead to unintended consequences and disruption in the banking system. Additionally, a CBDC could also raise serious privacy concerns and lead to a lack of financial anonymity.
If the bill passes Congress, the US would become a global leader in digital asset regulation, with its quality control mechanism creating an attractive environment for investment in innovation. However, there is no clear deadline for the bill’s passage. Congress is focused on other issues like prescription drug pricing reform and tax increases. Although the Senators behind the bill worked closely with industry lobbies and trade associations, skeptics of the crypto industry are likely to remain on the sidelines for now. The question remains whether the situation changes after November.
When To Expect the Lummis-Gillibrand Bill?
United States Senator Kirsten Gillibrand recently announced that a new draft of the Lummis-Gillibrand bill will come in April.
During a Senate Agriculture Committee hearing on the oversight of the CFTC, Senator Gillibrand asked CFTC chair Rostin Behnam for his opinion on the crypto bill. The senator highlighted the importance of the legislation in creating a national conversation about a comprehensive approach to digital assets.
Gillibrand once again emphasized that the bill aims to regulate digital assets with the character of securities, which would fall under the purview of the SEC, and assets with the characteristics of commodities, which would be regulated by the CFTC. Additionally, stablecoins could be overseen by the Office of the Comptroller of the Currency (OCC). Tax provisions would be put in place for the entire industry.
Behnam applauded Senators Gillibrand and Lummis for their careful consideration of all components of the market in the latest draft of the crypto bill. He cited concerns about stablecoins and cybersecurity, and pointed out that the industry experience drawbacks by the collapse of firms such as FTX, Voyager Digital, BlockFi, and Terra.
The CFTC chair said that the bill would need to address issues such as segregation of assets, conflicts of interest, vendor risk, and third-party service providers to ensure that they protect customer interests. According to Behnam, appropriate safeguards must be put in place to address these issues.
Will The Congress Approve the Bill?
Although the Lummis-Gillibrand bill remains bipartisan work, it is uncertain whether the new Congress will move forward with the legislation. Senator Lummis had previously that the bill was “a lot for them to digest.” If passed by both the Senate and House and signed into law, the bill would provide much-needed regulatory clarity for the crypto industry. It would also determine which assets fall under the purview of the SEC and CFTC, putting an end to the confusion that has plagued the industry for years.
The release of the new draft of the Lummis-Gillibrand bill in April is an important development for the crypto industry. If passed, the legislation would provide regulatory clarity for many crypto projects and address the issues that have plagued the industry.
However, the passage of the bill remains uncertain. It remains to be seen whether the new Congress will move forward with the legislation. The bill would help regulate digital assets, providing a regulatory framework for the industry. The crypto community is also eager to learn whether the bill will pass as it will be a sigh of relief for the industry.
Here is a video of Senator Lummis protecting Bitcoin in front of Congress, which has been receiving a lot of support from the crypto community:
In conclusion, the release of the new draft of the Lummis-Gillibrand bill in April is a significant step for the crypto industry. It would provide much-needed regulatory clarity and address the issues that have been plaguing the industry. The bill would determine which assets fall under the purview of the SEC and CFTC, ending the confusion that has long existed. Although its passage remains uncertain, the bill has the potential to be a game-changer for the crypto industry.