Lummis-Gillibrand Crypto Bill

The “Lummis-Gillibrand Responsible Financial Innovation Act” is the first broad bipartisan crypto bill introduced to the US Senate. The coauthors of the bill serve on the board of organizations that oversee both the SEC (Securities Exchange Commission) and CFTC (Commodity Futures Trading Commission), the powerful agencies that help in regulating the US Financial Markets.

The key takeaways of the RFIA (Responsible Financial Innovation Act) include:

• The Act helps classify digital assets as either securities or commodities. The Act makes this determination by analyzing the purpose of the asset and the rights and powers the asset conveys to the consumer, based on how decentralized the asset is and the entrepreneurial and managerial efforts required for the asset to function. This will provide digital asset companies clear understanding of their regulatory obligations. This section of the Act is a refined version of the Howey test which classifies an asset as a security if the following conditions are met:

a. If money or assets are invested into a common enterprise by investors who expect some future profits.

b. If the profits come from the promoter and the investors have no control over the profits.

• RFIA provides common definitions for the digital asset, virtual currency, payment stable coins, smart contracts, and other relevant concepts.
• RFIA defines an “ancillary asset” as a fungible digital asset that would be regulated by CFTC unless it can be shown to be a security. The bill would let CFTC regulate the crypto commodity spot markets since tokens would be classified as “ancillary assets”. Presently, this includes major tokens such as Bitcoin and Ethereum.

Any ancillary assets that are not sufficiently decentralized will have to report twice a year to the SEC.

• RFIA provides the Right to self-custody of digital assets i.e. no citizens can be forced to store their crypto with an intermediary or a bank.
• No taxes on transactions under $200 would be levied.
• Mined assets (assets that use a Proof-of-Work consensus mechanism) such as Bitcoin and Zcash would only be taxed post fiat conversion. Furthermore, the act directs agencies to analyze the energy consumption of digital assets. This can have a detrimental impact on PoW assets which have large energy requirements. For eg, recently, the state of New York banned certain Bitcoin mining operations.
• The bill makes it difficult for anonymous projects to function. This would result in fewer scams and rug pulls in the future.
• RFIA clarifies that an exchange’s bankruptcy would not affect the user’s digital assets. In the present scenario, if Coinbase gets liquidated, the users’ assets become the company’s assets, as mentioned by the CEO, Brian Armstrong a few months back. Post the bill, the users would retain control over their digital assets even in case of a centralized exchange's bankruptcy.
• The act opens the gate for a potential CBDC(Central Bank Digital Currency) by the US Government, just like the Chinese Digital Yuan.
• As far as stable coins are concerned, RFIA only allows for 100% liquid asset-backed collateralized coins. This could potentially shut down doors for novel algorithmic stable coin innovations such as USDD and Frax. Furthermore, a dominant USD pegged stable coin would solidify USD’s significance as a truly global currency.
• RFIA requires all the US states to follow uniform state banking and regulatory laws.
• RFIA advises IRS to create new guidelines to regulate activities such as airdrop, staking, mining, and soft and hard forks.
• RFIA mentions that regulatory authorities need to analyze the risk of including digital assets in 401(K) retirement savings. This is a huge win for companies such as Fidelity which is looking to offer employees the option to invest up to 20 percent of their 401(k)s in Bitcoin.
• The bill would open lobbying groups to start experimenting with crypto products in a regulated “sandbox” environment. A restrained environment would stymie innovation because the legacy institutions have no incentive to promote novel ideas that can harm them in the long term.
• RFIA would shut down any future ICO(Initial Coin Offering).
• RFIA requires exchanges, stable coin providers, and certain DAOs to be registered entities in the US for tax purposes. The act currently does not govern unincorporated DAOs or Defi protocols but plans to cover them in the future.
• RFIA also establishes rules for the privacy and confidentiality of information shared between State and Federal financial regulators. This is a drawback of the Act since this sets up an opaque regulatory barrier.

Conclusion

I believe some regulatory oversight is needed in the present Wild Wild West of the Crypto space. The Act would increase the trust of market participants in the system and let large institutional investors and sovereign funds invest in a compliant fashion. This is needed especially when institutions such as Celsius and Three Arrows Capital have been behaving like complete Crypto Degens.

Therefore, RFIA is a very welcoming regulation that would result in the long-term progress of the blockchain ecosystem by balancing investor protection, the need to provide information to the marketplace, and legal certainty for innovators.