Titles VI and VII of the Responsible Financial Innovation Act, which have been introduced by Cynthia Lummis and Sens. Kirsten Gillibrand, would authorize the chartering of unsound, unsafe, and uninsured stablecoin financial institutions. The Lummis-Gillibrand crypto bill ignores important lessons from the last 50 years of financial regulation and could imbibe the seeds for the upcoming banking crisis.
Title VI would permit the states and the Office of the Comptroller of the Currency to lease special-purpose financial institutions that offer stablecoins. Stablecoins are virtual assets that can be redeemed on demand and promise to maintain parity with any kind of fiat currency such as the US dollar. Stablecoins are virtual deposits, but the Gillibrand-Lummis crypto bill would enable stablecoin banks to function without federal deposit insurance. The bill would also allow stablecoin banks to associate in a variety of “incidental” activities.
10 Primary Points Of The Lummis-Gillibrand Crypto Bill
On June 7, Senator Kirsten Gillibrand (D-NY) and Senator Cynthia Lummis (R-WY) unraveled the long-anticipated 69-page draft of the Lummis-Gillibrand Responsible Financial Innovation Act (“Act”). The Act is indicated to formulate a regulatory structure for digital assets, formulate legal reform and regulation throughout several regulatory companies, and update present laws with language related to digital assets. All digital currency sector participants should consider the following 10 key points of the Lummis-Gillibrand crypto bill.
1. Attempts to formulate a standard for evaluating which digital assets are items and which are securities
This act allows the classification of digital assets as commodities or securities. The bill makes this evaluation by determining the aim of the asset and the rights and powers the asset communicates to the user, which will help offer digital asset entities with the ability to evaluate their regulatory obligations.
The bill invests the CFTC (Commodity Futures Trading Commission) with regulatory authority over digital asset spot markets dependent on the drafters’ evaluation that most virtual assets are similar to items in comparison to securities. This implies digital assets that meet the explanation of a commodity, like Bitcoin and Ethereum, will be regulated by the CFTC if the Lummis-Gillibrand crypto bill becomes law.
3. Applies to a broad variety of crypto sector players
The crypto bill 2022 applies to businesses, corporations, crypto-brokers, and any other bodies that hold licenses that are offered by several governmental bodies to engage in transactions including the transfer, use, and/or issuance of virtual or digital assets, smart contracts, and many more. Instances of such may involve cryptocurrency exchanges like Binance, Kraken, Gemini, and many more. Unincorporated DAO (decentralized autonomous organizations), digital asset users, and DeFi (decentralized finance) protocols are not articulated explicitly and/or managed by this act. However, the catch of this act is that all language recommends DeFi protocols and DAOs could be roped in later, as the bill is applicable to individuals or entities
“required by law to hold such a license, registration or similar authorization.”
4. Formal definitions
The Act (Section 9801 of title 31 United States Code) tries to offer formal, helpful, definitions for “digital asset intermediary,” “digital assets,” “smart contracts,” “virtual currency,” “payment stable coin,” and several other customary words in the digital currency industry.
a. Particularly and as a cursory outline,
a digital asset is a natively electronic asset, that confers economic, proprietary, or access rights or powers; and is recorded using cryptographically secure distributed ledger technology, or any similar analog including virtual currency and ancillary assets, consistent with section 2(c)(2)(F) of 11 the Commodity Exchange Act, payment stablecoins, consistent with section 403 of the Legal Certainty 13 for Bank Products Act of 2000 (7 U.S.C. 27a), and other securities and commodities, subject to subparagraph A.”
b. “A digital asset intermediary, in relevant part, is a person who holds a license, registration, or other similar authorization under the Commodity Exchange Act, Securities Exchange Act of 1934, and others that may conduct market activities relating to digital assets and stablecoins.”
c. “Virtual currency is defined as a digital asset that is used primarily as a medium of exchange, unit of account, store of value, or any combination of such functions is not legal tender, does not derive value from, or is backed by an underlying financial asset (except other digital assets), and includes a digital asset…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.”
5. Consumer safety for stablecoin issuers
The Lummis-Gillibrand crypto bill needs all payment stablecoin issuers to have a 100 percent reserve as well as elaborate disclosures about the assets backing all the stablecoin. Issuers must also make sure that holders may redeem stablecoins at a 1:1 ratio in identified legal tender.
6. Contemplates the national security measures of digital currency
For instance, this cryptocurrency bill 2022 explicitly refers to the “digital yuan,” which is the “official CBDC (central bank digital currency) of the People’s Republic of China,” and orders that
“Not later than 60 days after the date of enactment of this Act, the Director of the Office of Management and Budget, in consultation with the Administrator of General Services, the Director of the Cybersecurity and Infrastructure Security Agency, the Director of National Intelligence, and the Secretary of Defense.”
This is done to,
“develop standards and guidelines for executive agencies which require adequate security measures for use of the digital yuan on government information technology devices.”
7. Uniform laws for states
The Lummis-Gillibrand crypto bill directs and mandates state banking and regulatory supervisors to accept uniform money transmitter license needs for transactions including digital assets within two years.
8. Broker definition expands
The bill amends Section 6045(c)(1)(D) of the Internal Revenue 22 Code of 1986 to illustrate a “broker” as
“any person who (for consideration) stands ready in the ordinary course of a trade or business to effect sales of digital assets at the direction of their customers.”
9. Important tax implications
The Lummis crypto bill does not include the gross income for federal income tax aimed at gains or losses from the disposition of digital currency in a personal transaction for the buy of commodities or services, offered the gain or loss shall not increase more than $200. However, this exclusion is not levied to dispose of digital currency for other fiat currency, securities, digital assets, commodities, securities, or digital currencies, whether they result in a profit or loss.
10. Consumption of energy to be studied
Ultimately, the Lummis-Gillibrand crypto bill directs the Federal Energy Regulatory Commission (FERC) to evaluate and report on energy consumption in the digital asset area. Certain forms of virtual currency mining have lately been under scrutiny for consuming too much energy. The FERC will evaluate the best avenues to take advantage of mining technology in the desire that the U.S. can meet its climate and clean energy aims.
The Lummis-Gillibrand crypto bill tries to offer a regulatory structure to the hugely unregulated crypto space. The bill seeks to divide virtual assets based on their intended aim, with most under the regulatory authority of the CFTC. Digital assets that are considered securities would not be virtual assets at all, and instead would be subject to the authority of the SEC. If legislated into law, this bill will further mainstream crypto adoption, or could it regulate the fledgling sector out of existence? Only time can tell us these.