Sens. Cynthia Lummis, R-Wyo. Cynthia Lummis (R-Wyo.)

This bill is the most comprehensive effort yet to come out of the U.S. Senate. The crypto industry relies on the Senate to regulate itself in the United States. The bipartisan duo’s first bill failed to make any significant progress last year, and this year, the intentions of key figures like Sen. Sherrod (D-Ohio), chairman of the Senate Banking Committee remain unclear.

The biggest part of the bill is the division it creates between securities oversight, and everything else – the long-awaited division which would give the SEC their crypto marching order. The bill says assets that do not give an investor a financial stake in a company should not be classified as securities. This is true even if the asset “benefits from entrepreneurial and management efforts that determine its value.”

The majority of progress in this legislative session so far has come from the House. Republicans are focusing on two bills, one to regulate crypto markets and the other to set rules for stablecoins. Lummis and Gillibrand, however, had already carried the hopes of a large part of the crypto community when they presented the first version of their bill in the year 2022. Some of these ideas found resonance in subsequent legislation. Lummis and Gillibrand 2.0 is now available to the crypto industry. It follows the House’s proposals, but takes some detours of its own.

CFTC Oversight

The bill as it is now would place most crypto tokens under the CFTC commodities division and give that agency the power to regulate crypto trading. The same $500 million would go to both agencies, and both would have equal say in the new crypto self-regulatory body (SRO).

The idea of creating a “go-between” entity like the National Futures Association, or the Financial Industry Regulatory Authority, in the securities industry, is still controversial. Lummis & Gillibrand propose a separate entity to regulate industry standards and enforce penalties for violations. It’s called the “consumer and market integrity authority” in this case.

The law would also require that customers’ assets be fully segregated, and set new standards of risk management for crypto lending. It would outright ban “rehypothecation,” where crypto firms stretch their credit by using customer assets. In the last year, several crypto platforms have declared bankruptcy. They revealed that they had used or loaned customer funds to extend their own credit and were unable to honor withdrawal requests.

Stablecoins that are regulated

stablecoins, which are dollar-based tokens such as Tether’s USDT or Circle Internet Financial’s USDC, could only be issued through banks and credit unions that were regulated by either the federal government or states. However, existing issuers would have priority to obtain newly created licensing in this role. The U.S. Comptroller would create a new charter to become a stablecoin holder.

Lummis & Gillibrand also push a definition of decentralized finance, which sets strict rules when a software program veers into a centralized business endeavor and needs to be registered. DeFi was not included in previous proposals to regulate.

People familiar with the efforts behind the new legislation said that the senators had met Lael Briand, former Federal Reserve Governor and director of White House National Economic Council, who was responsible for the research on central bank digital currencies (CBDC). They spent about an hour discussing the details of the bill. People familiar with the effort behind the new bill said that the staffs of the lawmakers have had regular contact as well with the relevant agencies. The people said that this bill was intended to be a compromise between the two parties. Many of its provisions had been taken directly from proposals by other legislators, like Sen. Elizabeth Warren, D-Mass. is a crypto-critic.

The SEC, under Gary Gensler, has been aggressive in enforcing existing securities laws on prominent crypto companies . The SEC’s latest enforcement campaign has targeted Binance and Coinbase, accusing them of operating illegally.

Lummis, Gillibrand and other senators have not yet joined the effort, even though they occupy the same seats in the Senate committees evaluating the bill. Due to the 50-50 split in the Senate, legislation will need to be able attract a broad range of bipartisan support. Recent history shows that for financial legislation to become law, committee chairs must be directly involved. Examples include the Dodd-Frank Act of 2010, or the 2018 Banking Overhaul pushed by Sen. Mike Crapo.

The U.S. Congress, which is already sluggish, could cut this effort into smaller pieces or incorporate it into other bills. However, every month that passes brings the U.S. one step closer to the presidential election. The number of hearings held in the House and Senate indicates that crypto is a top priority for both parties. However, it is unclear when the crypto bill will be brought to the floor and sent to President Obama.

“While the Lummis and Gillibrand proposal from the Senate is a significant step forward, we will be watching the House to see if there are any changes in the House legislation on stablecoins and market structures,” said Georgia Quinn. She is the general counsel at Anchorage Digital. Anchorage Digital occupies a unique role as the only digital asset bank that has an OCC charter.

Lummis-Gillibrand’s $1.4 billion funding over five years is another potential source of heated debate. The bill raises the money by holding cryptocurrency to the same wash sales tax restrictions as securities. This means that a taxpayer cannot benefit from crypto losses that resulted from a sale followed by a repurchase of those same assets. The bill also requires crypto intermediaries account for their assets, calculating the market value and paying tax on gains annually.

It also offers significant tax advantages for crypto investors. For example, they won’t be taxed until they receive the assets they earned from mining, stakes, forks, or airdrops. Tax exemptions are given to crypto payments that buy goods or services under $200. This could allow cryptocurrencies to become real currencies, without the tax burden.

Read more: SEC Chair Gensler Suggests Lummis and Gillibrand Bill May “Undermine” Market Protections

UPDATE (12 July 2023, 1441 UTC) : Anchorage Digital adds a comment.

UPDATE (12 July 2023 at 20:09 UTC: Added link to the full text of bill.

Nikhilesh De.