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Sweeping US ‘crypto’ bill elevates CFTC’s role in regulating digital assets

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A long awaited bi-partisan bill aimed at creating a clear regulatory framework for digital assets in the United States has been formally introduced by co-sponsoring Senator Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY). The Responsible Financial Innovation Act is designed to improve flexibility, innovation, transparency and consumer protections with regard to digital assets.

“The United States is the global financial leader, and to ensure the next generation of Americans enjoys greater opportunity, it is critical to integrate digital assets into existing law and to harness the efficiency and transparency of this asset class while addressing risk,” Senator Lummis said in a statement.

“The bipartisan Responsible Financial Innovation Act is a landmark bill that will establish a regulatory framework that spurs innovation, develops clear standards, defines appropriate jurisdictional boundaries and protects consumers. Importantly, the Lummis-Gillibrand framework will provide clarity to both industry and regulators, while also maintaining the flexibility to account for the ongoing evolution of the digital assets market,” Senator Gillibrand said.

One of the bill’s most important features is that it seeks to clarify the role played by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) in regulating digital assets and the industry generally. Both agencies have been increasingly involved in enforcement actions against digital asset companies, but the bounds of their responsibility are unclear and neither have explicit authority over the digital asset industry.

The SEC is responsible for securities (the definition of which captures many digital assets) while the CFTC is responsible for commodities, but as Ethereum’s slide from arguable commodity to clear security has demonstrated, demarcating digital assets in this way and then leaving it to either regulator to assume responsibility will inevitably leave gaps and create situations in which their respective regulatory regimes are not fit for purpose.

With the new bill, the SEC will remain responsible for digital assets which amount to securities; however, the CFTC will be designated as the authority responsible for those which are not. It amounts to a significant elevation of the CFTC in its role in regulating digital asset markets.

It’s an interesting choice. The CFTC is largely viewed as the more pro-digital asset of the two agencies, with the CFTC reporting 113 enforcement actions in FY2020 (the last year for which records are available) compared to the 434 brought by the SEC last year. But the CFTC is a much smaller agency than the SEC, and with this proposed expansion of the CFTC’s responsibilities, it’s about to get a budget increase.

 The bill also introduces a clear distinction between digital assets which qualify as securities and those which are commodities, focusing on the purpose of the asset and the rights it gives to consumers. It adopts the SEC’s definition of securities. Particular focus is on the issue of decentralization (as it is in the Howey test), including provision for digital assets which begin life as securities to later be reclassified as commodities if they become sufficiently decentralized. Regulators have struggled to bring their understanding of digital assets in line with their conception of decentralization, often leading to inconsistent results.

Provision is also made for stablecoins. If passed in its current form, the bill would obligate issuers of stablecoins purporting to be 100% asset backed and claiming to be redeemable to make those coins redeemable for its equivalent dollar value. This would appear to close the loophole currently being enjoyed by Tether, the terms of service of which assigns no obligation for the company to redeem their stablecoins at all.

Digital asset service providers—such as exchanges—are also given increased disclosure requirements under the bill. It requires that exchanges ensure that its customers understand the products they are purchasing and the risks attaching to them—a timely requirement given the recent filing of a gargantuan passing-off case against a number of exchanges concerning their use of the Bitcoin name to sell unrelated products.

Other features addressed by the bill include:

  • A requirement for the Federal Energy Regulatory Commission to analyze and report on energy consumption in the digital asset industry;
  • The creation of a regulatory sandbox for state and federal regulators to collaborate on innovative financial technologies
  • The development of ‘robust’ cybersecurity standards, with particular regard to sanctions avoidance, money laundering and terrorist financing.

Having just been introduced, the bill is in its early stages and must now pass Senate scrutiny before it is sent to the House of Representatives and then on to the President for assent. One reason for optimism that the bill will pass—aside from its bipartisan sponsorship—is that Lummis serves on the Senate Banking Committee, while Gillibrand serves on the Agriculture Committee, which itself oversees the CFTC. It wouldn’t be the first time proposed digital asset legislation failed to take off, however. 

Read the full text of the bill here.

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