They say when good ol’ Uncle Sam sneezes, the whole world catches a sniffle. The epithet seems relevant to the sphere of crypto regulation, as most regulators globally have been dragging their feet in the drive to establish clear legal frameworks around the industry, waiting for the US’s first move.
It appears that the Sheriff has put out a notice to all the Bandidos and rogues of the wild, wild west of crypto, and their days of degeneracy are officially on a countdown.
The US Senate has agreed to a bipartisan bill that clears a lot of hurdles surrounding the creation of a regulatory framework for digital assets. The bill officially named the “Responsible Financial Innovation Act” was presented by Senators Cynthia Lummis (R) and Kirsten Gillibrand (D).
Lummis is the Representative from Wyoming and is the co-chair of the Financial Innovation Caucus Center. She also sits on the Agriculture Committee. Gillibrand is the junior senate Representative for New York and had declared her candidacy for the presidency in 2020. She sits on the Banking Committee.
Here are some of the major takeaways from the bill, from my current reading.
- The drafting of the bill was guided by principles like safety, soundness, accountability, transparency, and consumer protection. It was a unified project, prompted by a spirited push for regulatory guidance from industry leaders and allied lobby groups (Crypto execs have contributed millions towards election funds. FTX CEO Sam Bankman-Fried said he’d consider donating between $100 million to $1B in the upcoming elections, should Donald Trump consider vying again).
- The framework has clarified the definition of crypto securities and commodities, allowing retail investors to have a proper legal distinction between various digital assets. Cryptos will not be treated as securities unless holders enjoy certain rights traditionally left exclusively for qualified investors e.g dividends, liquidation rights e.t.c. Extra disclosures to the SEC (Securities and Exchange Commission) shall also be required of entities seeking to raise cash via the sale of digital assets.
- Bitcoin and Ether are to be treated as commodities, thereby falling under the jurisdiction of the Commodities, Futures, and Trading Committee (CFTC). The rest are likely to be treated as securities, thus falling under the purview of the SEC. The default standard used to define security in SEC v Howey shall prevail. This also solves the inter-agency squabbling that had undermined crypto thus far.
- The bill creates a set of standards for stablecoin issuers. Issuers will have to be 100% reserve backed with high liquidity assets, and required to issue detailed, periodical reports/ audits on their reserve status. The bill also proposes a licensing regime for non-bank issuers in the form of a special charter. A huge positive, as the Senate recognizes the potential of stablecoins in complementing and competing with current banks.
- Legal clarification on how customers’ funds shall be treated in case of bankruptcy of an exchange. Coinbase had recently kicked up a storm in the crypto community when a clause in one of their recently publicized SEC filings purported to grant them permission to use customer’s tokens in their deposit to refund investors in the event of a liquidation.
- A $200 de-minimis exclusion on small-scale purchase of goods and services.
- Crypto spot markets shall be under the jurisdiction of the CFTC.
- A suggestion to create a regulatory sandbox.
The movers of the bill lauded both sides of their aisle, the SEC, the CFTC, and other industry players for their cooperation in the lengthy effort. Previous attempts at legislation had been fraught with inconsistency and an anti-innovative spirit. For example, the contentious definition of a “crypto broker” would have resulted in wallet providers, software developers, and other retail investors being burdened with unnecessary tax disclosures.
The bill still needs to be approved by four more committees, namely the Banking, Agriculture, Intelligence, and Financial Services committees.
Wyoming is set to cash in on the regulatory clarity, as it pushes its bid to establish itself as a commercial crypto hub. The state has created a special licensing regime through an innovative banking charter, allowing crypto providers to exist as special purpose depository institutions. 48 major crypto LLCS have registered commercial entities there, including some big names like Kraken.
Overall, the bill seems to provide much-needed clarity, while maintaining an air of flexibility and is an upgrade from the rather prescriptive SEC regime that has been guiding the industry. The CFTC also appears better positioned as a financial watchdog, in terms of surveilling fraud and market manipulation, whilst ensuring investor protection.
PS. If you want to take a deep dive into the doc, you can find it here. I assure you, it is not a 600-page encyclopedia as crypto Twitter would have you believe.
Norman Gabula Commercial & Tech Lawyer | Crypto, Blockchain & Decentralized Finance and Consultant Sheria Online.
