New Legislation Proposed to Govern Financial Innovation

Potential Areas of Impact and Key Terminology To Know

Originally published June 21, 2022.

Last week, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the bipartisan Lummis-Gillibrand Responsible Financial Innovation Act (the “RFIA”). With many in the digital asset industry calling for regulatory clarity, RFIA represents forward momentum and a chance to foster a greater understanding of digital asset related issues on both sides of the aisle. This article explores key aspects of the proposed bill, as well as definitions of key terms. Additional legislative proposals addressing digital assets and stablecoins specifically are expected to be introduced in the months ahead.

What separates RFIA from the other 50+ digital asset legislative proposals that Congress has seen so far is its breadth and depth of scope: RFIA is the most wide-reaching and comprehensive digital asset bill to be proposed in the United States to date. It also, notably, has bipartisan sponsorship.

While the benefits and drawbacks of this bill will be debated for months to come, understanding the bill can inform those arguments and help investors form a long-term view on digital assets in the United States. Below we highlight a few of the key terms in the bill along with some related implications.

Key Aspects and Terms

Legislating the rapidly expanding digital asset ecosystem requires careful definitional work. There are so many new blockchains, protocols, and tokens that to properly govern them all, these innovations need to be consistently defined. Let’s review some of the key definitions from the RFIA that may help shed light on the future of digital assets in the United States:

• Digital Assets: Under the proposed legislation, the term “digital asset” would be codified at the federal level. This definitional standard has the potential to help state and federal regulators better navigate legal waters with a common understanding of what exactly digital assets encompass, and facilitate cohesion between them. In the RFIA, a digital asset is defined as:

[A] natively electronic asset that (i) confers economic, proprietary, or access rights or powers; and (ii) is recorded using cryptographically secured distributed ledger technology, or any similar analogue; and [B] includes (i) virtual currency and ancillary assets, consistent with the Commodity Exchange Act; (ii) payment stablecoins (as defined below); and (iii) other securities and commodities, that meet the digital asset definition.

• Payment Stablecoins: Another key definition is “payment stablecoins,” which are included in the definition of identified banking products and are neither commodities nor securities.Distinct from other types of stablecoins that are not fully collateralized or algorithmic by design, payment stablecoins must be backed by one or more financial assets valued at 100% of the face value of outstanding payment stablecoins (excluding other digital assets and virtual currencies), issued by a business entity, and accompanied by regular issuer statements that the asset is redeemable on demand. Stablecoins that do not fit this definition — such as algorithmic stablecoins — will not be considered payment stablecoins under the RFIA. For a full definition, see below:

(A) [I]s redeemable, on demand, on a one to one basis for instruments denominated in United States dollars and defined as legal tender or for the instruments defined as legal tender under the laws of a foreign country (excluding virtual currency defined as legal tender under the laws of a foreign country); (B) is issued by a business entity; © is accompanied by a statement from the issuer, that the asset is redeemable as specified in subparagraph (A) from the issuer or another identified person; (D) is backed by 1 or more financial assets (excluding other digital assets), consistent with subparagraph (A); and (E) is intended to be used as a medium of exchange.

• Virtual Currencies: The virtual currency definition contrasts the payment stablecoin definition in a few key ways. For instance, while payment stablecoins are explicitly intended to act as mediums of exchange, virtual currencies consist of digital assets that can be used primarily as a medium of exchange as well as a unit of account and store of value, or any combination of such functions. The RFIA’s virtual currency definition encompasses algorithmic stablecoins such that they do not derive value from an underlying financial asset (except other digital assets). While this distinction separates virtual currencies from payment stablecoins, both fall under the umbrella definition of digital assets. Below, you can see the full definition of virtual currency:

[A] digital asset that (i) is used primarily as a medium of exchange, unit of account, store of value, or any combination of such functions; (ii) is not legal tender, as described in section 5103; and (iii) does not derive value from or is backed by an underlying financial asset (except other digital assets); and (B) includes a digital asset, consistent with subparagraph (A) that is accompanied by a statement from the issuer that a denominated or pegged value will be maintained and be available upon redemption from the issuer or other identified person, based solely on a smart contract.

Finally, the bill grants the Commodity Futures Trading Commission (CFTC) jurisdiction over digital asset spot markets and allows exchanges to register as a digital asset exchange under the CFTC. This has the potential to expand the CFTC’s jurisdiction and provide greater regulatory clarity for businesses exploring digital assets.

Becoming Law

Whether or not some iteration of the RFIA will pass remains up in the air. But some of the definitions that Senators Lummis and Gillibrand put forward may become foundational to other legislation. Exploring how these definitions might apply to digital innovations can help investors stay ahead of the curve. To learn more about digital assets, subscribe for updates here.