On June 7, 2022, US Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced a bipartisan bill to regulate the cryptocurrency/digital asset market. A copy of the Lummis-Gillibrand Responsible Financial Innovation Bill (“Lummis-Gillibrand” or “Bill”) is available here. While the Lummis-Gillibrand bill will no doubt undergo substantial changes before – and if – it becomes law, its bipartisan provenance points to likely directions for US crypto/digital asset law and regulation. Some of the Lummis-Gillibrand arrangements are groundbreaking. The bill’s proposals include:
Securities regulations versus commodities
- On the lingering issue of securities versus commodity regulation, to theoretically separate a digital asset from the investment contract that sells it. The investment contract would be a security and regulated by the United States Securities and Exchange Commission (“SEC”). The theoretically separated digital asset would be called an “ancillary asset” to the investment contract – a novel idea – and regulated as a commodity, where applicable, by the Commodity Futures Trading Commission (“CFTC”). Digital assets having no attributes of securities such as debt or equity securities, liquidations, dividends and profit participation rights derived from the management efforts of others would be presumed to be subject to the jurisdiction of the CFTC, with the exception of non-fungible tokens (NFTs) or other non-fungible digital assets and most stablecoins issued by depository institutions (currently the SEC has jurisdiction over “digital asset securities” ).
- Authorization of one-time crypto asset exchanges for the physical delivery of digital assets to be registered with the CFTC.
- Amend the Infrastructure Investment and Jobs Act 2021 to include in its expanded definition of “broker” any person responsible for carrying out the transfer of digital assets on behalf of another person.
- Allow depository institutions to issue payout stablecoins (those redeemable in US dollars) subject to reserve and redemption requirements.
- Prohibits banks from using reputational risk in review ratings and requires appropriate reasons for requesting termination of a customer account.
- Excludes gain or loss of US$200 or less in “goods and services” transactions from gross income for federal income tax purposes.
- Make it clear that proceeds from crypto/digital mining and staking are not treated as gross income until the taxpayer exercises dominance over them.
- Makes it clear that a loan of digital assets is generally not a taxable event.
- Applies in its jurisdiction to incorporated and licensed legal entities, but not to unincorporated “decentralized autonomous organizations” or “DAOs”, users of digital assets, and “decentralized finance” or “DeFi” protocols.
- Requires regulated entities to disclose transaction-specific information to consumers.
- Directs state regulators to adopt uniform money transfer licensing requirements for digital asset transactions.
We previously reported on the Biden administration’s March 9 executive order launching a government-wide effort to study and report on necessary development and regulation in the digital asset market – cryptocurrency (see, US Executive Order Issued to Develop Cryptocurrency/Digital Asset Regulatory Framework, March 10, 2022, available here).
The government-wide reports to be released on the EO will no doubt inform future actions on the Lummis-Gillibrand bill and any other Congressional action on cryptocurrencies and digital assets. However, unlike the EO, the Lummis-Gillibrand bill is an actual private member’s bill that can, with or without amendments, be passed by both houses of Congress and signed into law by President Biden. We will closely follow the progress of the Lummis-Gillibrand bill through the legislative process and report in detail on any final legislation.