Why New US Crypto Legislation Could Be Good for the Industry’s Long Term Future
A bipartisan cryptocurrency bill sponsored by US Senators Cynthia Lummis of Wyoming and Kirsten Gillibrand of New York was introduced to the Senate earlier this month, known as the Responsible Financial Innovation Act. Essentially, it’s designed to provide a regulatory framework for crypto, including clarity around the role of regulatory entities, and including updates to current laws regarding digital assets. The key provisions of the Act in the published 69 page draft “addresses CFTC and SEC jurisdiction, stablecoin regulation, banking, tax treatment of digital assets, and interagency coordination,” according to Gillibrand.
In simple terms what this means is that first, regulatory control over crypto assets will be transferred to the Commodity Futures Trading Commission (CFTC). As a result, digital assets that meet the CFTC’s definition of a commodity, including Bitcoin, will be regulated by them. The commission currently regulates commodities such as corn and oil and financial instruments such as futures, forwards, and swaps. This will bring about a significant change in the regulation of crypto assets, which the Securities and Exchange Commission (SEC) has monitored until this point.
Second, stablecoins will lose decentralization, as the bill states needs to be backed by fiat currencies, in other words stablecoins need to provide a 100% reserve as well as detailed disclosures about the assets backing the stablecoin. Some proponents argue that this key provision, in the context of Terra’s dramatic decline, will help prevent something similar from happening in the future. In addition, the bill requires guarantees that stablecoins can be exchanged for fiat currency at a 1:1 ratio in recognized legal tender. Another component of the bill is a guaranteed redemption mechanism for stablecoin users, which means that if a user tries to cash out their stablecoin into the underlying fiat currency, the project side of the stablecoin cannot reject the user’s redemption request, which can fundamentally guarantee the interests of stablecoin holders.
To determine whether cryptocurrencies should be regulated by the SEC or CFTC, the bill will employ what’s known as the Howey test. The test dates back to 1946 when the US Supreme Court adopted the measure to determine which transactions qualify as securities. If cryptocurrencies are considered securities, the SEC will have jurisdiction over them. If not, then the CFTC will be responsible for oversight. “The Act makes this determination by analyzing the purpose of the asset and the rights and powers the asset conveys to the consumer, which will help provide digital asset companies with the ability to determine their regulatory obligations,” confirmed legal experts. To reiterate, as most cryptocurrencies, including Bitcoin, are not defined as securities they will be regulated by the CFTC. As the commodity regulator CFTC gains regulatory authority over digital asset spot markets, to note.
It’s also worth noting that the legislation applies to a wide variety of crypto industry participants, from crypto exchanges such as Binance to any entities that hold licenses to conduct crypto business. That said, decentralized autonomous organizations (DAOs), digital asset users themselves, and decentralized finance (DeFi) are not explicitly mentioned. However, as the Act is applicable to entities “required by law to hold such a license, registration or similar authorization,” this suggests this status could change in the future. And in terms of national security provisions, it also stipulates 60 days after the Act becomes law, for the relevant agencies to “develop standards and guidelines for executive agencies which require adequate security measures for use of the digital yuan on government information technology devices.”
When news of the Financial Innovation Act was announced, the cryptocurrency space reacted with widely differing views. As reported in Cointelegraph, Blockchain Association executive director Kristin Smith said in a statement on the association’s website, “The bipartisan legislation announced today by Senators Lummis and Gillibrand represents a milestone moment for crypto policy and a major step forward for the crypto industry in Washington.” Some reports suggest that many support classifying cryptocurrencies as either commodities or securities. Still, others have criticized the need to tie stablecoins to fiat currencies, arguing that this would likely be an attempt by the government to control it through legislation — a practice typical of centralized marketplaces. While SEC Commissioner Hester Pierce, in a piece co-authored with CFTC Commissioner Caroline Pham, said: “Crypto gives us a new opportunity to cooperate and do so publicly. As an initial step, we are calling on our agencies to hold a joint set of public roundtables to evaluate recent market events and risks, and to discuss how to regulate crypto responsibly.”
BigONE believes that the bill’s introduction is a relatively significant piece of legislation, and it is unclear whether it will remain intact in one piece or if it will be divided into parts to facilitate implementation. But either way, the bill is not expected to go into effect this year, leaving enough time for both supporters and opponents to make their case. But in any case, the need for crypto regulation in the current downturn has become overwhelming, which should be good news for the cryptocurrency market that looks to grow sustainably in the future.