US Commodity Trade Regulator In Lummis-Gillibrand Crypto Bill

Senators Cynthia Lummis (Republican) and Kirsten Gillibrand (Democrat) proposed a bill to regulate crypto. The Responsible Financial Innovation Act (RFIA) covers taxation matters of digital assets, their use in retirement investing, new issues of coins (securities aspects), custody and customer protection rules, and stable coin (payment system aspects). A large part of amendments of this 69-page document expands the jurisdiction of Commodity Futures Trading Commission (CFTC) over digital assets.

A bit of background on this policy and the authors. Originally announced by Senator Lummis in December 2021, the bill was expected to create a new watchdog for digital assets. Cynthia Lummis is known as a big proponent of digital assets in Congress, reportedly having bought her first Bitcoin, with the advice of her son-in-law in 2013. She is a member of the Senate’s Banking Committee, that also oversees SEC.

Kirsten Gillibrand from Democratic party, is a member of the Senate’s Committee on Agriculture, Nutrition and Forestry. This Committee works on commodity trading matters with CFTC, but would be a distant candidate for digital asset regulatory work otherwise. Nevertheless, a Republican SEC overseer and a Democrat CFTC overseer made a great public appearance of consensus for the new bill.

There is an ongoing debate on the nature of digital assets — whether it should be treated as a security (SEC scope) or as a commodity (CFTC scope). Without this clearance, digital assets will remain only under the limited regulatory scope for money transmitters that includes prevention of illicit activities through them, but leaves significant risks to the users who are uninsured.

Back in 2017 with the booming ICO activities SEC had a stronger argument that these issues should be treated as securities and protection of the investors would be treated in a similar way as in other investing areas. Now with flourishing trading markets and strong speculative features of digital assets, CFTC seems to possess the necessary experience and toolset to handle them.

The position of Chairman of CFTC, Rostin Behnam shows that the agency is ready for this.

“…there are thousands of coins, and I certainly agree that many of them and probably hundreds of them replicate security coins and should be regulated as securities. But there are also many commodity coins, and we could start with the two biggest coins within the market capitalization of digital assets, Bitcoin and Ether, … these are two of the biggest coins that are commodities, look like commodities, and I think should be regulated by a commodity regulator.

In Mr. Behnam’s opinion, unlike the financial markets where there are requirements for periodic reporting, commodity markets are more concerned with disclosures on the risks associated with the investment in that type of assets and “guardrails” for the operators (exchanges, brokers, etc.) that protect the investors’ rights. CFTC has been successful in regulating the commodity marketplace and they have interest and responsibility to oversee digital assets as well, he mentioned.

So, the bill will draw a line between digital assets that will be treated as commodities under the exclusive jurisdiction CFTC and those that represent debt or equity rights to be supervised by SEC. Stablecoins and NFTs remained with SEC.

Other contents of the bill include:

• Taxation clarification: exemption from capital gain tax on income of up to $200 if crypto is used for purchases. Similar exemption exists for foreign currency gains in US
• PoW mining topics: a direction for Federal Energy Regulatory Commission (FERC) to analyze reports on energy consumption in the digital asset industry.
• Digital Yuan concerns: a direction for the Director of the Office of Management and Budget, in consultation with the Administrator of General Services, the Director of the Cybersecurity and Infrastructure Security Agency, the Director of National Intelligence, and the Secretary of Defense to “develop standards and guidelines for executive agencies which require adequate security measures for use of the digital yuan on government information technology devices.”

The bill is expected to go through hearings and come into the force next year. The authors are collecting feedback form State agencies and look to ‘crypto community’ participation as well. The timing of this regulatory initiative could also indicate a competition for the dominant standards that set an example in the international arena — a few days before it was the European lawmakers that announced an agreement on the basic digital asset regulation for the EU.