On Tuesday, Senators Kirsten Gillibrand and Cynthia Lummis presented the first major bipartisan legislation taming the “Wild West” crypto market, identifying digital assets as commodities like wheat or oil and giving the Commodity Futures Trading Commission the authority to regulate the nascent industry.
The Responsible Financial Innovation Act, according to Gillibrand, is the result of months of collaboration in the House and Senate and is a critical first effort to structure the markets for digital assets with long-awaited legal definitions.
“Landmark bipartisan legislation that will build a thorough regulatory framework for digital assets that supports responsible financial innovation, flexibility, openness, and robust consumer safeguards while incorporating digital assets into existing law,” their offices said.
The legislation’s cornerstone is the definition of the vast array of digital assets available to American investors and consumers.
Digital Currencies or “Ancillary Assets”
The bill classifies digital currencies as “ancillary assets,” or intangible, fungible assets issued or sold in conjunction with the purchase and sale of a security, with a few exceptions. Under US law, the ancillary assets would be classified as commodities and fall under the CFTC’s control.
According to aides to Gillibrand and Lummis, their proposed legislation treats all digital assets as “ancillary” unless they act like the security that a company would issue to raise funds.
The Securities and Exchange Commission will not recognize cryptocurrency and other digital coins as traditional securities unless the holder is provided the same benefits as corporate investors, such as dividends, liquidation rights, or financial interest in the issuer, said officials.
While staffers described the plan as a combination of input from politicians on both sides of the political divide, they admitted that its breadth and complexity might require lawmakers to break it apart and pass its parts separately.
They went on to say that the bill is the result of months of conversation with senators from both parties, including Republicans like Minority Leader Mitch McConnell and Pat Toomey and Democrats like Ron Wyden.
Daniel Kahan, a lawyer in King & Spalding’s cryptocurrency and blockchain department, said that the legislation is likely to be a good move for investors who believe the SEC’s guidelines for decentralized digital tokens are illogical.
“It’s partly because the securities regulatory environment is so restrictive,” said Kahan, who frequently represents financial technology firms. “All of these technical components of the regime around reporting and trading, as well as other things that aren’t directly related to fraud, are being focused on.”
“Rather than these very technical prescriptive parts of the current securities law framework,” he noted, the CFTC “would be much more suitable to focus on investor protection and anti-fraud and anti-market-manipulation-type concerns.”
Other new disclosures would provide investors with information on issuers’ experience generating digital assets, the price history of issuers’ prior assets, expected costs, and descriptions of each issuer’s management teams and obligations.
Handing crypto regulation to the CFTC, believes Dennis Kelleher, a co-founder of Better Markets, is a deliberate attempt to push responsibility onto an agency that Government has left without resources for years.
He claims that the bill effectively de-regulates crypto since the CFTC is unprepared to regulate such a sophisticated and fast-growing industry. “Actually, in my opinion, it’s considerably worse,” he continued, “because it’s designed to fool the public into thinking it’s regulating crypto.”
The crypto market, which is now unregulated by the CFTC, might evolve into a larger systemic concern, cautions Kelleher.
“Giving the CFTC power over cryptocurrencies is like giving a small-town police agency jurisdiction over New York City,” he remarked. “You might see a cop now and then, but the crooks will be controlling the show for the most part.”