After months of teasing, U.S. Senators Kirsten Gillibrand (D-NY), a member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY), a member of the Senate Banking Committee, have introduced the Responsible Financial Innovation Act that would redefine the U.S. government’s relationship with bitcoin and other cryptocurrencies.
Dubbed the Lummis-Gillibrand bill for short, it is the first major bipartisan attempt to create a comprehensive regulatory framework for digital assets in the U.S. If it becomes law, the bill would not only define many long-confusing terms and battles over jurisdiction but formally recognize digital assets as a legitimate part of the U.S. financial system, requiring regulators to study and clarify their positions on various issues.
“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 Senator Lummis in a statement.
Specifically, the 70-page document contains provisions aimed at settling the turf disputes between the Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) by assigning regulatory authority over digital asset spot markets not deemed securities to the CFTC. The measure would give the derivatives regulator more power in areas where SEC Chairman Gary Gensler has asserted his agency should take the lead and formally introduces the term “digital assets” to the CFTC’s Commodities Exchange Act passed in 1936.
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Other notable features include new requirements for cryptocurrency exchanges: a requirement that Decentralized Autonomous Organizations (DAOs) be incorporated under the laws of a recognized jurisdiction; a so-called de-minimis exclusion of up to $200 worth of cryptocurrency per transaction from a taxpayer’s gross income for payment for goods and services; and the exclusion of assets obtained by cryptocurrency mining from a taxpayer’s gross income until the mined crypto is actually sold. The bill would also delay for two years (until 2025) and amend the crypto broker tax reporting requirements passed last year as part of the bipartisan infrastructure package.
Notably, the bill includes a new crypto-specific interpretation of the Howey Test used by the SEC to determine if an asset is a security and a path by which assets that are deemed securities can have their classification changed once they become sufficiently decentralized. Though there’s still a long way before such changes become law, the bill has extra strength because Lummis serves on the Banking Committee that oversees the U.S. Securities and Exchange Commission and Gillibrand serves on the Agriculture Committee, overseeing the Commodity Futures Trading Commission (CFTC).
Following the collapse of the $60 billion TerraUSD/Luna stablecoin ecosystem, the new bill also aims to establish core principles for banks and non-banks that issue stablecoins, digital tokens pegged to some external asset such as the U.S. dollar or gold. Notably, the law would require a 100% reserve for stablecoin issuers. Lawmakers and other officials, including Treasury Secretary Janet Yellen, have escalated calls for increased regulation of stablecoins since the TerraUSD collapse, which exacerbated a weeks-long sell-off in the cryptocurrency market.
“The time has come for the U.S. Congress act in a bipartisan manner to identify national policy and formulate a broad and balanced framework that is tailored to the unique features of the emerging internet of value. The Lummis – Gillibrand legislation seeks to do that,” says former CFTC chairman Christopher Giancarlo. Kraken’s chief legal officer Marco Santori called the legislation “thoughtful and comprehensive,” in a statement, and Coinbase’s head of U.S. policy, Kara Calvert, called it “meaningful legislation to create regulatory clarity for digital assets.” However, prior to the release of the bill, 26 technologists published a widely reported letter to Congress warning them to take a skeptical approach to crypto Utopianism and resist crypto lobbying.
The joint effort was first announced in March 2022 at an event hosted by Politico in Washington, when Lummis and Gillibrand revealed that they were working together. Both senators are vying to turn their respective states into prominent crypto hubs. Lawmakers in Wyoming have enacted multiple laws to accommodate crypto banks and decentralized trading platforms. In New York, Mayor Eric Adams has sought to draw the attention of cryptophiles by investing his early paychecks in bitcoin and ether.
Among other considerations, Lummis and Gillibrand are also proposing to create an advisory committee composed of industry experts, advocacy groups and federal and state regulators to develop guiding principles for the regulatory agencies and advise lawmakers on the fast-developing technology.
At the press briefing ahead of the bill’s release, Chris Land, Senator Lummis’s general counsel, and Arjun Ghosh, Sen. Gillibrand’s finance counsel, said their teams have talked with both the SEC and the CFTC, offices of other members of the Senate including those of Pat Toomey (R-Pa.), Mitch McConnell (R-KY) and Debbie Stabenow (D-MI) as well as multiple industry advocates and experts to finalize the language of the bill.