It was first announced before Christmas that Wyoming Senator Cynthia Lummis was going to present a comprehensive bill on cryptography. Republican Lummis was already known for her position on cryptocurrencies and immediately announced that she was looking for a Democratic supporter. New York Sen. Kirsten Gillibrand, who had not previously been known to have a strong position in cryptocurrency, was named as a co-sponsor in March. The long-awaited Financial Responsible Financial Innovation Act (RFIA) was introduced in the U.S. Senate on June 7.
RFIA is 69 pages of thick text with legal and cryptographic punctuation. It is, however, an element of drama that lurks behind the dry wording of the bill as it sets out what needs to be done and who should do it in the face of inaction, confusion and inter-agency competition that characterizes the US Digital Assets Regulation today. . .
Lummis and Gillibrand are well suited for this. Lummis is a member of the Senate Banking Committee, which oversees the Securities and Exchange Commission (SEC), a leading actor in the performing arts. Gillibrand is a member of the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission (CFTC) – another member.
“I do not think the CFTC is the primary regulator” in the digital real estate market, Gillibrand told the Washington Post in a live broadcast on June 8. “They just have a duty to control Bitcoin and Ether, the majority of cryptocurrencies today. But the SEC has a huge responsibility. […] And so we are not reducing the role of the SEC, but we are strengthening both regulators to start taking this market and providing it with security and trust.
Division of labor
The two senators have repeatedly said that most altcoins are securities, as SEC Chairman Gary Gensler has long maintained, and RFIA continues to rely on the Howey test to define securities. That test was introduced in the 1946 Supreme Court ruling on the sale of orange groves in Florida.
According to the Howey test, these orange grove sales were primarily to non-Florida buyers who were not located in Florida and could leave the land under the previous owner of WJ Howey Co., investment contracts and thus securities under the Securities Act of 1933.
The innovation in RFIA comes from the extrapolation of the Howey test. Lilya Tessler, head of fintech and the blockchain group Sidley Law Firm, told the Cointelegraph:
“The court did not say that oranges were securities. The court never said what law applies to the content of an investment agreement. “
In the case of RFIA, the content of an investment agreement is a product and subject to CFTC regulations, unless it can be demonstrated that it is a security. And it will be called ancillary assets – a concept that is new to cryptocurrency. Symbols in the initial coin offering (ICO) were used as an example in one discussion of ancillary assets. The bill’s definition of ancillary assets also states that it varies.
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This innovation does not remove the question of devolution. It was a devolution of power, recalls Tessler, who founded Bitcoin (BTC) and Ether (ETH) as commodities, in line with the principles outlined by William Hinman in his 2018 speech, which has proved so controversial. According to RFIA, additional assets that are not sufficiently diversified must provide information to the SEC twice a year.
Patrick Daugherty, a partner at Foley & Lardner, praised that solution. “It’s creative,” Daugherty told the Cointelegraph. “It is not determined by case law, but it is in line with traditional views on the value of regular disclosure.
The legislation authorizes the CFTC to monitor cryptocurrencies, ie cryptocurrency exchanges, which are now mainly subject to the law on government money transfers. The additional layer of the regulation would mean that the stock exchanges would be subject to CFTC rules on investor protection, handling of funds and other requirements. The Digital Commodity Exchange Act, introduced in the House of Representatives this year, also called on the CFTC to monitor that market.
RFIA grants the CFTC the right to collect regulatory fees to fund its ancillary activities.
Pay your taxes – or not
The provision of the bill that will reliably please cryptocurrency users is the exclusion of $ 200 from gross revenue for businesses that use cryptocurrencies to purchase goods and services. This exclusion allows the use of cryptocurrencies as intended without creating taxable potential capital gains. This is also not a new idea.
Profits from mining and mortgaging would be taxable when redeemed under RFIA. This gives clarity that Joshua and Jessica Jarret are looking for in their case against the Director of Internal Revenue, Raul Garcia, Certified Public Accountant and Principal at Kaufman Rossin, the Cointelegraph pointed out.
The bill prescribes the Auditor General’s report on pension investments in digital assets, another topic in recent lawsuits.
The short section on decentralized independent organizations (DAOs) is the most complex. It turns out that DAOs are taxable operators and encourages their implementation. An exception is made when the DAO is raising money for charity.
This provision opens up “an opportunity for another state to do what Delaware and South Dakota did,” Garcia said. These states have become a center for the registration of other types of business units.
The bill also requires the Minister of Finance, or a representative, to approve guidelines on a list of open questions within a year of the bill being enacted.
Do your job
RFIA instructed the central bank to process digital asset bank applications for the main accounts “on a fair basis” and in order of receipt. Custodia Digital Asset Bank filed a lawsuit against the Federal Reserve Board and the Kansas City Central Bank on the day the legislation was enacted. Custodia, formerly known as Avanti, claimed that the Fed had broken the law by withholding its application for the main account for 19 months without taking action.
“It literally takes a parliamentary act to get them to do their job,” Daugherty said, emphasizing that the bill directs the central bank to act but does not tell him what to do.
The bill devotes an entire chapter to “Responsible co-ordination between institutions”, which requires a variety of reports. Among other things, it orders regular reports on energy use from the Federal Energy Regulatory Commission, which requires the SEC and CFTC to consult with the Treasury and the National Institute of Standards and Technology on grid safety. It therefore directs the CFTC and the SEC to develop a proposal for a self-regulatory body.
A ten-member advisory committee is appointed. It will publish annual reports on the development of the digital asset industry.
Response to the bill
There was a broad consensus among observers that the bill is favorable for cryptocurrencies.
“It’s really bilateral,” Daugherty told RFIA. “You can see the compromises.”
Lummis has repeatedly stated his belief that crypto is not partisan. She said in a live broadcast on June 8, which also included CFTC chairman Rostin Behnam, that Gensler had told her he had not read the bill.
The chairman of the Senate Banking Committee, Sherrod Brown, told Bloomberg at a similar time that he had not read the bill either, but he “was not inclined to support it”.
Speaking at a Wall Street Journal summit a week later, Gensler said when asked about the bill: “We do not want to undermine the protection we have in the $ 100 trillion capital market.
Blockchain Association chief executive Kristin Smith called the bill a “milestone” in a statement. She continued: “We thank Senators Lummis and Gillibrand for participating in the industry in this bill and we look forward to continuing to work with them as we refine the language and go through the process.
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Better Markets President and CEO Dennis M. Kelleher issued a statement saying the bill “appears to be designed to disarm the public by making them believe that cryptocurrencies are properly managed while the industry and insiders know it is simple” not true.
Mark Hays, a senior expert on Americans for Financial Reform, said in a statement: “Just because an industry that injects millions into the political process claims to be innovative does not mean it deserves its own special rulebook.
Debbie Stabenow, chair of the Senate Agriculture Committee, and John Boozman, a member of the rankings, are also expected to introduce legislation on cryptocurrencies. It is reported that the bill supports the CFTC to take the lead in regulation.
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