A Second Round of the Lummis-Gillibrand Crypto Bill Elevates CFTC, Defines DeFi

Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) are re-introducing a crypto oversight bill that would mandate that all stablecoin issuers be regulated depository institutions and that cryptocurrency exchanges be regulated by the Commodity Futures Trading Commission (CFTC), pushing the U.S. Securities and Exchange Commission (SEC) to the sidelines.

Senator Cynthia Lummis, a Republican from Wyoming, and Senator Kirsten Gillibrand, a Democrat from New York, speak during the DC Blockchain Summit in Washington, D.C., US, on Tuesday, May 24, 2022. The summit is gathering the most influential people focused on public policy for digital asset and blockchain innovations, according to the organizers. Photographer: Valerie Pleasch/Bloomberg

Advertisements

The U.S. Senate is necessary for the crypto business to receive U.S. regulation, and this measure marks the Senate’s most comprehensive effort to date. The bipartisan duo’s first plan didn’t make much headway last year, and this year, it’s unclear what important figures like Senate Banking Committee Chairman Sherrod Brown (D-Ohio) would like to see happen.

The most significant provision of the plan is the line it establishes between securities regulation and everything else, a divide that would offer the SEC and CFTC direction on how to regulate cryptocurrencies. In general, it states that assets should not be regarded as securities even if they “benefit from entrepreneurial and managerial efforts that determine the value of the assets.” This is because they do not grant the investor a financial interest in the business. Cryptocurrency issuers would be required to submit twice-yearly reports to the SEC, but as long as their tokens don’t represent debt, equity, or other types of ownership, they would remain outside of the agency’s purview – unless the agency succeeds in a judicial challenge detailed in the bill.

The House has made the most headway so far in this legislative session, as Republicans have taken a particular interest in two legislation that address stablecoin regulations and the regulation of the cryptocurrency markets. However, before to those recent efforts, Lummis and Gillibrand had carried, when they filed the initial version of their bill in 2022, the legislative hopes of a large portion of the cryptocurrency sector, some of which had echoes in later legislation. Lummis-Gillibrand 2.0, which generally advances the House ideas while making some of its own diversions, is now available to the industry.

CFTC regulation

In its current form, the bill would give the CFTC control over cryptocurrency trading and include the majority of crypto tokens inside its definition of a commodity. However, both organizations would receive the same $500 million in funding, and they would each have an equal say in the creation of a new self-regulatory organization (SRO) for cryptocurrencies.

It is still debatable whether such a middleman should be established, similar to the National Futures Association or the Financial Industry Regulatory Authority in the securities industry. Lummis and Gillibrand are essentially advocating for the creation of a separate body to oversee industry standards and apply sanctions for noncompliance. It is referred to in this instance as the “consumer protection and market integrity authority.”

Aside from explicitly prohibiting “rehypothecation,” in which crypto businesses utilize customers’ funds to extend their own credit, the legislation would also require that customers’ assets be entirely segregated and create new risk-management criteria for cryptocurrency lending. Over the past year, a number of cryptocurrency exchanges filed for bankruptcy, disclosing that they had loaned out or otherwise spent customer assets and could no longer process withdrawal requests.

Regulated stablecoins

Stablecoins, which are typically dollar-based tokens like Tether’s USDT and Circle Internet Financial’s USDC, could only be issued by banks or credit unions subject to federal or state regulation; however, it would allow current issuers to get new licensing for that function before anyone else. Through the U.S. Comptroller of the Currency, for example, it would establish a new type of charter to be a stablecoin issuer.

A definition for decentralized finance (DeFi) that establishes tight guidelines for when a software project veers into a more centralized business activity and needs to be registered as an exchange is also being promoted by Lummis and Gillibrand. Previous attempts at regulating have failed to include DeFi.

According to those familiar with the initiative behind the new bill, the senators discussed the specifics of the legislation for about an hour with Lael Brainard, director of the White House’s National Economic Council and a former governor of the Federal Reserve who oversaw its research into central bank digital currency (CBDC), about a month ago. According to the sources, the staffs of the MPs maintain continuous communication with the pertinent financial organizations. They said that many of the measures in this bill, many of which were taken verbatim from those of other lawmakers, including ardent crypto opponent Sen. Elizabeth Warren (D-Mass. ), were intended to strike a compromise between the parties.

SEC acts

While the sector waits for this and other bills to actually advance, like as being approved by one of the relevant House or Senate committees, the SEC, led by Chair Gary Gensler, has been working assiduously to attach well-known cryptocurrency companies to current securities regulations. In its most recent enforcement campaign, the SEC accused both Binance and Coinbase of conducting its operations unlawfully.

Although Lummis and Gillibrand jointly sit in the Senate committees that will be considering their legislation, they have not yet persuaded other senators to support it. Legislation must be able to win broad bipartisan support due to the Senate’s 50-50 party split. The Dodd-Frank Act of 2010 and the 2018 banking reform, both of which were championed by Sen. Mike Crapo, the then-chairman of the Senate Banking Committee, are examples of financial legislation that needs the direct involvement of committee chairs in order to become law.

This attempt might be broken up into smaller pieces or folded into other laws, but every month that the United States gets closer to the next presidential election increases the political importance of significant actions from an already inert U.S. Congress. It’s evident that both parties have prioritized cryptocurrency this year based on the number of hearings held in the House and Senate, but it’s not clear when a measure will come up for a floor vote and be delivered to the president’s desk.

The $1.4 billion in funds that Lummis-Gillibrand provides over five years is another topic that could spark heated debate. It does this by subjecting cryptocurrencies to the same wash-sales tax rules that apply to stocks, which prevents taxpayers from recovering losses from cryptocurrencies if they resulted from sales that were swiftly followed by repurchases of the same assets. Additionally, under the proposed legislation, cryptocurrency middlemen would have to “mark to market” their holdings each year in order to account for their assets and pay taxes on gains.

However, it also comes with some major tax advantages for cryptocurrency investors, such as the fact that they won’t have to pay taxes on the cryptocurrency they receive from mining, staking, forks, or airdrops until they actually use the new assets. Additionally, any cryptocurrency payment used to pay for products or services costing less $200 is excluded from taxes. This could open the door for the usage of cryptocurrencies as real money without creating any tax difficulties.