Updated: Bipartisan Crypto Legislation Introduced in Congress | Practical Law

Updated: Bipartisan Crypto Legislation Introduced in Congress | Practical Law

US Senators Kristen Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced a bipartisan bill, which would create a regulatory framework for digital assets.

Updated: Bipartisan Crypto Legislation Introduced in Congress

Practical Law Legal Update w-035-8430 (Approx. 6 pages)

Updated: Bipartisan Crypto Legislation Introduced in Congress

by Practical Law Finance
Published on 09 Jun 2022USA (National/Federal)
US Senators Kristen Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced a bipartisan bill, which would create a regulatory framework for digital assets.
On June 7, 2022, US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Responsible Financial Innovation Act (RFIA), which would create a regulatory framework for digital assets. The bill is designed to:
  • Provide regulatory clarity for agencies charged with supervising digital asset markets.
  • Provide a strong, tailored regulatory framework for stablecoins.
  • Integrate digital assets into existing tax and banking law.
  • Protect consumers.
  • Spur innovation in the field of digital assets.
Under the bill, the SEC would maintain responsibility for digital assets that are classified as securities while the CFTC would be assigned regulatory authority over digital asset spot markets and digital assets that meet the definition of a commodity. The bill defines the term “decentralized autonomous organization” as an organization:
  • Which utilizes smart contracts (as defined in section 9801 of title 31, US Code) to effectuate collective action for a business, commercial, charitable, or similar entity;
  • Governance of which is achieved primarily on a distributed basis; and
  • Which is properly incorporated or organized under the laws of a state or foreign jurisdiction as a decentralized autonomous organization, cooperative, foundation, or any similar entity.
The bill is divided into eight sections and begins with the creation of common definitions for terms such as digital asset, virtual currency (VC), payment stablecoin, decentralized autonomous organization (DAO), ancillary asset, and smart contract. The bill then clarifies distinction between digital assets that are commodities and digital assets that are securities by focusing on the purpose of the asset and the rights and powers it gives to consumers. The bill suggests splitting the digital asset from the investment contract under which it is sold it to create an ancillary asset subject to the Commodity Exchange Act (CEA) and CFTC oversight.
The bill would create a structure for the taxation of digital assets and therefore would clarify the tax treatment of different actors and actions in the digital asset industry and includes a de minimis exclusion of up to $200 per transaction from a taxpayer's gross income for use of VC for payment for goods and services.
In addition, the bill specifies that income related to crypto mining and staking activities would be deferred until the taxable year in which there is a disposition, and would clarify that a loan of digital assets is generally not a taxable event for the lender. The bill also specifies that the default classification of a decentralized autonomous organization shall be as a business entity which is not a disregarded entity. For more information on the classification of entities as disregarded entities for US federal income tax purposes, see Practice Note, Choice of Entity: Tax Issues: Disregarded Entity.
The bill is also designed to provide protection for consumers by imposing disclosure requirements on digital asset service providers to ensure that consumers are able to make informed decisions when engaging with digital assets including:
  • Customer agreements that disclose the scope of permissible transactions involving digital assets.
  • Notice requirements for customers.
  • Clear disclosure of terms of lending services by digital asset service providers.
Additionally, depository institutions would be allowed to issue payment stablecoins, digital assets redeemable on demand on a one-to-one basis for legal tender, subject to reserve and redemption requirements. However, all issuers of payment stablecoins would be required to:
  • Maintain high-quality liquid assets valued at 100% of the face value of all outstanding payment stablecoins.
  • Provide public disclosures on the assets backing the stablecoin and its value.
  • Have the ability to redeem all outstanding payment stablecoin at par in legal tender.
In order to keep on top of rapidly developing technology, the bill would create an advisory committee to develop guiding principles, and assist regulatory agencies and lawmakers. Seeking to spur innovation in the digital asset space, the bill provides a regulatory sandbox for state and federal regulators to collaborate on pioneering financial technologies.
The bill also calls upon various other agencies and directs:
  • The Federal Energy Regulatory Commission (FERC) to analyze and report on energy consumption in the digital asset industry.
  • The CFTC and SEC to study and report on the development of a self-regulatory organization (SRO) and develop a proposal for its creation.
  • The CFTC and SEC to consult with US Department of the Treasury and the National Institute of Standards and Technology to develop comprehensive, principles-based guidance relating to cybersecurity for digital asset intermediaries.
  • The Government Accountability Office (GAO) to conduct an analysis of the potential opportunities and risks associated with investing retirement savings in digital assets.
  • The Office of Management and Budget (OMB), along with the Cybersecurity and Infrastructure Security Agency, the Director of National Intelligence, and the Defense Department, to conduct an information security study around the digital yuan, China’s central bank digital currency (CBDC).
Update: On July 12, 2023, Senators Gillibrand and Lummis reintroduced the Lummis-Gillibrand Responsible Financial Innovation Act, which has been revised based on feedback from regulatory stakeholders, including the SEC and CFTC.
Update: On July 26, 2023, the House Financial Services Committee passed the legislation out of committee.