For the first time before Christmas, it became known that Wyoming Senator Cynthia Lummis plans to introduce a comprehensive cryptocurrency regulation bill. Republican Lummis was already known for his pro-Crypto stance and immediately announced that he was looking for a Democratic sponsor. In March, New York Senator Kirsten Gillibrand, who had not previously been known to take a strong stance on crypto, was named as a co-sponsor. The long-awaited Responsible Financial Innovation Act (RFIA) was presented to the US Senate on June 7th.

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RFIA is 69 pages of text with legal and crypto jargon. Behind the bill’s dry language, however, there is an element of drama, as it specifies what needs to be done and who should do it in the face of the inaction, confusion, and interagency competition that characterize digital asset regulation in the United States today. .

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Lummis and Gillibrand are well suited for this task. Lummis is a member of the Senate Banking Committee, which oversees the Securities and Exchange Commission (SEC), the protagonist of the drama. Gillibrand is a member of the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission (CFTC), another member of the roster.

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“I don’t think the CFTC is the main regulator” of the digital asset market, Gillibrand said live on the Washington Post on June 8. “They simply have to regulate bitcoin and ether, most of the cryptocurrencies today. But the SEC has a huge responsibility. […] And so we are not minimizing the role of the SEC, but we are enabling both regulators to start taking over this market and making it safe and sound.”

Division of labor

Two senators have repeatedly said that most altcoins are securities, as SEC Chairman Gary Gensler has long believed, and the RFIA continues to rely on the Howey test to identify securities. This test was introduced in a 1946 Supreme Court decision selling Florida’s orange groves.

Under the Howey test, these orange grove sales, predominantly to buyers who were not farmers and were not located in Florida and who may have left the land under the management of the previous owner, WJ Howey Co., were investment contracts and therefore securities under the securities dated 1933.

The RFIA innovation comes from an extrapolation of the Howey test. Lilia Tessler, head of the fintech and blockchain group at law firm Sidley, told Cryptooshala:

“The court did not say that oranges are securities. The Court has never said what law applies to the subject matter of the investment contract.”

For the purposes of the RFIA, the subject matter of an investment contract is a commodity that is subject to regulation by the CFTC, unless it can be shown to be a security. And it will be called an ancillary asset, a term that is new to crypto regulation. Tokens in Initial Coin Offering (ICO) were used as an example in one discussion of ancillary assets. The definition of an ancillary asset in the bill also indicates that it can be fungible.

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This innovation does not remove the issue of decentralization. It was decentralization, Tessler recalls, that made bitcoin (BTC) and ether (ETH) commodities in accordance with the principles of William Hinman. outlined in his 2018 speech that proved so controversial. Under the RFIA, ancillary assets that are not sufficiently decentralized will be required to file disclosures with the SEC twice a year.

Patrick Dougherty, partner at Foley & Lardner, praised the decision. “It’s creative,” Dougherty told Cryptooshala. “This is not dictated by case law, but is consistent with traditional notions of the value of periodic disclosure.”

The legislation gives the CFTC regulatory authority over spot markets for crypto assets, i.e. crypto exchanges, which are currently mostly subject to state money transfer laws. An additional layer of regulation would mean that exchanges would be subject to CFTC rules for investor protection, fund management and other requirements. The Digital Commodity Exchange Act, introduced by the House of Representatives this year, also called on the CFTC to control the market.

The RFIA gives the CFTC the power to charge a regulation fee to fund its additional activities.

Pay taxes – or not

A provision in the bill that crypto users are sure to enjoy is the exclusion of $200 from gross income for transactions using crypto to purchase goods and services. This exemption allows the cryptocurrency to be used for its intended purpose without creating taxable potential capital gains. This is also not a new idea.

Mining and staking profits will be taxable when realized in accordance with the RFIA. This gives the clarity that Joshua and Jessica Jarrett are seeking in their case against the Internal Revenue Service, said Raul Garcia, a certified public accountant and director of Kaufman Rossin, Cryptooshala.

The bill orders a report on pension investment in digital assets, another topic of recent litigation, from the Comptroller General.

US Senate Hall.

The short section on Decentralized Autonomous Organizations (DAOs) is the most difficult. It establishes that DAOs are taxable commercial entities and encourages their registration. An exception is made when the DAO raises funds for charity.

The provision opens “an opportunity for another state to do what Delaware and South Dakota did,” Garcia said. These states have become registration centers for other forms of business.

The bill also directs the Secretary of the Treasury or a delegate to take the lead on the open questions list within a year of the bill’s passing.

Do your work

The RFIA ordered the Federal Reserve to process applications from digital asset banks for master accounts “on a fair basis” and on a first-come, first-served basis. Custodia Digital Asset Bank filed lawsuit against the Federal Reserve Board and the Federal Reserve Bank of Kansas City on the day the law was passed. Custodia, formerly known as Avanti, alleged that the Fed broke the law by holding up a master account application for 19 months without action.

“It literally takes an act of Congress to get them to do their job,” Dougherty said, stressing that the bill directs the Fed to act but does not tell it what to decide.

The bill allocates a whole chapter to “Responsible interagency cooperation”, which provides for the preparation of various reports. Among other things, it commissions regular energy consumption reports 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 cybersecurity issues. He directs the CFTC and the SEC to develop a proposal for a self-regulatory organization.

An advisory committee of ten is ordered to be formed. It will produce annual reports on developments in the digital asset industry.

Response to the bill

There was a broad consensus among observers that the bill was cryptocurrency-friendly.

“It’s really a bipartisan process,” Dougherty said of the RFIA. “You see compromises.”

Lummis has repeatedly expressed her belief that cryptocurrencies are not partisan. During a live broadcast on June 8, which also featured CFTC chairman Rostyn Benham, she said that Gensler told her he had not read the bill.

Senate Banking Committee Chairman Sherrod Brown said Bloomberg did not read the bill at about the same time as the bill, but “was not inclined to support it.”

A week later, at The Wall Street Journal’s CFO Network summit, Gensler commented on the issue of the bill: “We don’t want to undermine the protections we have in the $100 trillion capital market.”

Blockchain Association Executive Director Christine Smith called account “milestone moment” in the statement. She continued, “We thank Senators Lummis and Gillibrand for engaging with industry on this bill, and we look forward to continuing to work with them as we refine the wording and move the bill forward in the process.”

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Better Markets President and CEO Dennis M. Kelleher came out a statement stating that the bill “seems to be designed to disarm the public into thinking that cryptocurrency will be properly regulated when the industry and insiders know this is simply not true.”

Americans for Financial Reform Senior Policy Analyst Mark Hayes said in a statement: “Just because an industry that pours millions into the political process claims to be innovative doesn’t mean it deserves its own particular set of rules.”

Senate Agriculture Committee Chair Debbie Stabenow and senior member John Boozman are also expected to introduce legislation to regulate cryptocurrencies. This account informed encourage the CFTC to take the lead in regulation.