Crypto’s big win: The Lummis-Gillibrand bill puts the CFTC in charge

The proposal gives the CFTC a leading role and pushes for the creation of a self-regulatory organization like FINRA.

Senator Cynthia Lummis, a Republican from Wyoming, and Senator Kirsten Gillibrand, a Democrat from New York, during the DC Blockchain Summit in Washington, D.C., US, on Tuesday, May 24, 2022. The summit is gathering the most influential people focused on public policy for digital asset and blockchain innovations, according to the organizers. Photographer: Valerie Pleasch/Bloomberg via Getty Images

The bill supports positions endorsed by the crypto industry, including the key argument that many cryptocurrencies should not be subject to securities regulations.

Photo: Valerie Pleasch/Bloomberg via Getty Images

“Most digital assets are much more similar to commodities than securities” won’t be music to Gary Gensler’s ears, but the crypto industry will likely welcome a bipartisan Senate bill unveiled Tuesday that puts a friendlier regulator largely in charge.

The Responsible Financial Innovation Act, introduced by Republican Sen. Cynthia Lummis and Democrat Kirsten Gillibrand, lays out how cryptocurrencies should be defined and regulated.

If it becomes law, it would be a victory for the crypto industry, which has long complained about insufficient or vague regulations governing digital assets and what it sees as the SEC’s aggressive enforcement-first posture.

The bill supports positions endorsed by the crypto industry, including the key argument that many cryptocurrencies should not be subject to securities regulations.

As was revealed in a leaked version of the bill, Lummis and Gillibrand would hand over key oversight responsibility to the CFTC, not the SEC, which has been known for aggressive enforcement actions against crypto companies under Gensler.

“Digital assets that meet the definition of a commodity, including bitcoin and ether — more than half of digital asset market capitalization — will be regulated by the CFTC,” a summary provided by Lummis’ office read.

The Wyoming senator, one of crypto’s staunchest advocates who disclosed that she held more than $100,000 in bitcoin last year, said in a statement that it is “critical that Congress carefully crafts legislation that promotes innovation while protecting the consumer against bad actors.”

Gillibrand, who represents New York, said the bill offers a framework that “spurs innovation, develops clear standards, defines appropriate jurisdictional boundaries and protects consumers.”

The bill would also require the CFTC and SEC to lead a study of creating a “self-regulatory organization” that would play “a complementary role, working with regulators to allow them to be more nimble and efficient, while maintaining strong supervision.”

The plan, which suggests the creation of private financial regulatory groups like FINRA and the National Futures Association, “would represent a major step forward in the professionalization of the digital asset industry,” Jonah Crane, a partner at Klaros Group, told Protocol.

Self-regulatory organizations “form the first line of defense for regulating large, complex markets” that “can write their own rules as well as enforce SEC or CFTC rules,” he added. “If you want to see digital assets regulated, that almost certainly means developing one or more SROs.”

Marc Fagel, the SEC’s former regional director for San Francisco and now a lecturer at Stanford Law, offered a more cautious view of setting up SROs for a relatively young and still rapidly evolving industry.

“I’m curious how it would work,” he told Protocol. “With FINRA, you have long-standing broker-dealers whose legitimacy and financing are well established. How many players in the crypto space have the same bona fides such that the regulators are willing to delegate oversight authority?”

Crane said the Lummis-Gillibrand bill offers “a thoughtful approach” to crypto regulation and “proposes to establish a mature regulatory framework that would empower regulators to bring digital asset markets more in line with existing regulated markets.”

Fagel also called the proposal “a step in the right direction.”

“I do worry about more of the oversight being shifted to the CFTC rather than the SEC,” he added. “The crypto space remains riddled with fraud and abuse, and the CFTC is even more underfunded and less aggressive than the SEC.”

The bill also resolves some regulatory gaps, clarifying everything from the tax treatment of crypto transactions to the reporting requirements for crypto companies.

Under provisions of the bill, people could make purchases with appreciated virtual assets “without having to account for and report income” up to a certain threshold. It also seeks to resolve a key issue that emerged in the passing of the Infrastructure Investment and Jobs Act of 2021 by stating that miners, node operators and other crypto-transaction participants will not be considered “brokers” for income tax purposes, which would impose reporting requirements on them.

The proposal also calls for the creation of a federal regulatory sandbox where crypto companies will be able to introduce and test innovative products in a controlled environment.

The bill also touches on the controversy over the environmental impact of the crypto industry by calling on the Federal Energy Regulatory Commission to “analyze and report” on energy consumption in the digital assets market.

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