United States Senator Cynthia Lummis (R-WY) believes digital asset evolution is the best way for the country to retain its international financial prestige. To this end, she and fellow Senator Kirsten Gillibrand (D-NY) are promoting the Responsible Financial Innovation Act—something she calls an “opening salvo in our federal discussion about digital assets.” The bill aims to clarify federal regulations on stablecoins, banking, Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) jurisdiction, and taxes. But how necessary are the Lummis-Gillibrand rules, and could they serve to protect some while sidelining others?
Conversely, SEC Chairman Gary Gensler suggested existing securities laws are adequate to deal with new blockchain/token projects. In a presentation to the Practicing Law Institute this week, he said:
“Nothing about the crypto markets is incompatible with the securities laws… investor protection is just as relevant, regardless of underlying technologies.”
In an opinion, Lummis said the need for the Responsible Financial Innovation Act comes as several global events threaten to dent or destroy the U.S.’s century-long dominance of world finance. The U.S. dollar’s position as the world’s reserve currency has meant low-interest rates, easier access to capital, and enviable purchasing power. However, that is at risk as other powers like China emerge, and irresponsible policies have seen the U.S. national debt skyrocket.
Lummis echoed long-held blockchain memes that decentralized digital assets (giving BTC as an example) provide a store of value to investors “that governments cannot inflate away.” She also mentioned broader applications for blockchain technology in logistics and supply chains, as well as “smart contracts.” Embracing digital asset innovation with clear regulatory frameworks “will help cement American financial leadership for years to come,” she said.
Much of the discussion surrounding Lummis-Gillibrand has focused on which digital assets should be regulated by the Securities and Exchange Commission (SEC) and by the Commodity Futures Trading Commission (CFTC). Gillibrand suggested that BTC and Ethereum‘s ETH were “definitely commodities,” while most other “altcoins” would be regarded as securities.
While CFTC head Rostin Behnam has spoken approvingly of the bill, SEC Chair Gensler has been far more cautious, suggesting it could create loopholes that undermine investor protections in the existing US$100 trillion capital market. Behnam has also stated that the CFTC’s jurisdiction should extend beyond just BTC and ETH.
Guaranteeing ETH’s status as a commodity is also questionable since the entire ecosystem lives on a transaction processing protocol that’s shifting to an entirely new set of rules and incentives. As the digital assets with the lion’s share of the overall blockchain market cap between them, BTC and ETH likely have the best lobbyists pushing their case for special treatment.
Commentators have suggested the Responsible Financial Innovation Act is unlikely to pass any time soon. Both lobbying from the blockchain industry and continued wrangling over definitions and jurisdiction between agencies like the SEC and CFTC will probably delay the things Lummis-Gillibrand seeks to clarify.
Wyoming as a national example?
Lummis is notable for becoming the first U.S. senator to openly own (blockchain) digital assets, having purchased BTC in 2013. The state she represents was already well on the way to becoming a base for blockchain and digital asset activities, and has passed a series of laws designed specifically to attract those businesses, even if many are Wyoming-based only on paper.
Wyoming’s laws were drafted with advice from lawyers at Ethereum development firm ConsenSys. They began by exempting digital assets from existing financial regulations in that state—such as securities rules and property taxes. It has also created special rules for digital asset banks, granting at least two charters. Those rules stipulate that the new banks must hold over 100% of their liabilities in reserve, cannot lend, must have a physical presence in Wyoming, and are not FDIC-backed.
However permissive Wyoming’s laws are, though, they still function more as an experimental “sandbox” for blockchain entrepreneurs and developers to experiment. That’s because only a tiny fraction of digital asset users actually live in Wyoming, and most businesses will still have to obey federal laws to operate in any meaningful way.
Lummis suggested Congress should “follow Wyoming’s example” in allowing banks to issue stablecoins, but requiring they be at least 100% reserved.
In one sense, it seems desirable to give the blockchain industry clearer guidance on what it can and can’t do. Federal legislation also goes some way to conferring legitimacy on these new financial technologies—for many years, uncertainty led traditional banks to ban digital asset interactions altogether and for investors to shy away.
On the other hand, it’s less desirable to produce specific rules that favor some blockchains over others, seemingly based on popularity and lobbying power over their functionality. This is especially true if blockchain protocols still haven’t settled on final “set in stone” rules, with the potential to alter their status after the fact. In this sense, Gensler’s approach of judging each digital asset individually and applying existing rules seems more sensible, even if it sometimes complicates things.
Watch: US Congressman Patrick McHenry on Blockchain Policy Matters with Bitcoin Association’s Jimmy Nguyen
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