This Week in Policy (6/15)

This Week in Policy (6/15)

你好金融科技爱好者… Challenging? Think of the only country that the Lummis-Gillibrand crypto bill requires the U.S. President to submit a report on “the…national security risks associated with the creation and use of…[its] official digital currency.”

As promised last week, this week’s article will be dedicated to the Lummis-Gillibrand crypto bill (“the bill”), titled the Responsible Financial Innovation Act, which was officially revealed last Tuesday. The bipartisan bill was introduced by Sen. Cynthia Lummis (R-Wy) and Kirsten Gillibrand (D-NY), and it is the most substantial and comprehensive crypto legislation in the U.S. to date. If you are wondering what you need to know about the 69-page bill, here is a list:

1.      SEC v. CFTC:

Should cryptocurrencies be considered securities, such as company stocks, or commodities, such as gold? This is probably the most intricate regulatory question in crypto regulation in the U.S. For years, regulators, experts, and crypto companies have been striving for a clear-cut distinction. Answering one way or the other determines the regulatory authority that has the power to control the issuance and circulation of cryptocurrency. If you remember from previous weeks, the only relevant guidance comes from the 1946 Howey case, which defines a security as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."


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The bill seeks to provide legal clarity through Sec. 301 by introducing the term “ancillary assets,” which would be an addition to the 1934 Securities Exchange Act. The new definition rests upon the rights a consumer enjoys with respect to the digital asset, which would be largely determined by the issuer. An ancillary asset would be an asset that is not fully decentralized and benefits from entrepreneurial and managerial efforts of a business entity that determines the value of the asset while not providing its holder voting rights, rights to interest, debt or equity, or liquidation rights.

According to the bill, ancillary assets are presumed to be a commodity that falls within the exclusive purview of the Commodity Futures Trading Commission (CFTC) rather than the less crypto-friendly Securities and Exchange Commission (SEC). Practically, this means that the CFTC would have “exclusive spot market jurisdiction” over bitcoin and ether, which both account for over half of digital asset market cap, as well as probably the top 200 digital assets by market cap. The SEC would have jurisdiction over tokens that are smaller in market cap but very large in numbers. In 2022, conservative estimates indicate that there are over 10,000 cryptocurrencies in circulation. Notably, the ancillary-asset presumption is not conclusive; the bill empowers the SEC to challenge the designation of any cryptocurrency as such in a federal court. Also, even if a cryptocurrency is considered an ancillary asset, the issuer would still be required to furnish disclosures with the SEC twice a year.

The last piece in the governance model proposed in the bill is a direction of the SEC and CFTC to conduct a study on a self-regulatory crypto organization, similar to FINRA, and registered digital asset associations.

2.      Innovation:

Remember when we talked about institutions? The bill seeks to support crypto innovation through three distinct institutions. (1) An Innovation Lab within the Treasury Department’s Financial Crimes Enforcement Network would be created to increase dialogue with the industry and launch pilot projects that enhance financial supervision. (2) Financial companies operating in an existing state fintech sandbox would be allowed to operate in other states that do not prohibit such activity, creating a de facto interstate regulatory sandbox. (3) An Advisory Committee on Financial Innovation would bring together members of the industry, experts in consumer protection and education, financial literacy and inclusion, commissioners of the SEC and CFTC, a Federal Reserve Board member, and a state regulator to update regulators on the evolving crypto market and the needs of the industry.

3.      Stablecoins:

Under the bill, stablecoins issued by a depository institution (e.g., banks and credit unions) are neither a commodity, nor a security. All stablecoin issuers would have to maintain a 100% reserve, publicly disclose the assets backing their stablecoin, and ensure, at all times, that their stablecoin is redeemable for USD. What does this mean? An end to the “algorithmically stable” coins, like UST-Luna, that were behind the Great Crypto Meltdown and the imposition of very high standards for issuing stablecoins that are currently met by fewer than a handful of players.

4.      The Environment:

The bill does not ban mining, but it directs the Federal Energy Regulatory Commission, in consultation with the SEC and CFTC, to conduct a study on the environmental aspects of mining and staking and the use of renewable energy in the crypto market.

5.      What Is Not in the Bill?

If you were looking for revolutionary crypto regulation in the bill, you should look elsewhere. The bill views blockchain technology as merely giving rise to risky investment opportunities, which makes it necessary to put guardrails in place to better protect investors. Beyond that, the bill does nothing to facilitate the mass adoption of the technology, except for a tax exemption of crypto gains of $200 or less, and a direction of the Government Accountability Office to study and report on the opportunities and risks of retirement investing in digital assets. And, although many observers consider the bill “a victory for the crypto industry,” the bill does not envision any consolidation among the “15 different agencies involved in…[crypto] processes.” The bill also does not tackle any of the thornier questions, such as the relationship between a future CBDC and stablecoins.

Should we expect the bill to become law soon? Not until the November mid-term elections in 2023 at the earliest, but it will definitely shape the debates over crypto policy in the U.S. and beyond in the months to come.

How does the bill align with your vision for good cryptocurrency regulation? In your opinion, which aspects of the bill have the biggest implications for crypto end-users?

I welcome all your thoughts and opinions in the comments section.

See you next week!