Introduction
On June 7, U.S. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) (together, the “Senators”) introduced the Responsible Financial Innovation Act, a bipartisan bill that seeks to create a comprehensive regulatory framework for digital assets. The Senators have stated that the purpose of the proposed legislation is to balance innovation with customer protection.
Coverage of the bill has been extensive, and Senators Lummis and Gillibrand have published a section-by-section summary of each provision. Understandably reactions have been mixed. Below we summarize and comment on some of the more important provisions. We then provide a summary of feedback from various stakeholders, as well as some general takeaways.
Key Provisions
Taxation
The bill creates a de minimis tax exemption for dispositions of virtual currency in personal transactions for the purchase of goods or services. In particular, up to $200 in gain or loss on the virtual currency used in the transaction can be excluded from the purchaser’s gross income. If adopted, this provision could improve Bitcoin’s use case as a currency to buy household goods and other necessities.
The bill also addresses the definition of “broker” for purposes of the infrastructure act that passed in August 2021. To the industry’s disapproval, legislators had tacked on a controversial expansion of the definition of “broker” and additional cryptocurrency tax reporting requirements. The bill clarifies the definition and delays implementation of the infrastructure act, as it relates to digital assets, to January 2025.
The bill contains certain other provisions that benefit miners and other validators. For example, the bill specifies that digital assets obtained from mining or staking activity will not be considered income until “disposition” when the digital asset is exchanged for cash or other assets. It is not clear why crypto asset miners should receive this type of tax subsidy.
Securities and Commodities
The bill grants exclusive authority over spot market transactions involving fungible digital assets that are not securities, including certain “ancillary assets,” to the CFTC. However, a security that constitutes an investment contract for purposes of the Securities Act would remain within the jurisdiction of the SEC. (Payment stablecoins issued by banks or certain other regulated depository institutions are expressly recognized as being neither commodities nor securities.)
“Ancillary assets” are defined to include intangible, fungible assets that are offered, sold or otherwise provided to a person in connection with the purchase or sale of a security through an arrangement or scheme that constitutes an investment contract under the Securities Act, unless such asset provides the holder with certain financial interests in the issuing entity. Subject to meeting certain SEC disclosure requirements that apply when offering or selling ancillary assets with an aggregate value greater than $5 million in a 180-day period, an ancillary asset is presumed to be a commodity unless a court issues an order finding that there is not a substantial basis for the asset to be a commodity.
The bill also allows (but does not require) a trading facility that offers or seeks to offer a market in digital assets to register with the CFTC as a digital asset exchange, and to make any digital asset that is not susceptible to manipulation available for trading.
Consumer Protection
The bill introduces a number of proposed consumer protections, including a requirement that providers of digital assets clearly disclose information regarding their product in customer agreements and agree with customers as to the terms of settlement finality for all transactions.
The bill would also codify a right for Bitcoin holders to self-custody their Bitcoin.
Stablecoins
The bill establishes a 100% reserve requirement, requires high-quality assets, and mandates public disclosures for payment stablecoin issuers. In light of the Terra/Luna fallout, this provision seems to seek to eliminate the risk of algorithmic stablecoins and other stablecoins that are unbacked (or not fully backed) by reserves. Thus an algorithmic stablecoin would need to be marketed as a security or commodity, depending on the design features of the governing protocol and other technical characteristics.
Banking
The bill reaffirms existing law requiring the FRB to make available payment, clearing and settlement services to any depository institution chartered under state or federal law. This issue is notable as it came under heated debate after the FRB delayed or denied the applications of some state-chartered nonbank institutions (e.g., Pot Credit Union, TNB USA, and Custodia) seeking access to FRB services.
The bill authorizes a special depository institution charter under both state law and the National Bank Act for payment stablecoin issuance, with tailored capital requirements and holding company supervision. In other words, the bill grants the OCC authority to charter a national bank for the exclusive purpose of issuing a payment stablecoin. The bill does not, however, require all payment stablecoin issuers to become depository institutions. This provisions seems aligned with the OCC’s Interpretive Letter 1172 and 1174.
Interagency Coordination
The bill throughout highlights information-gathering and the generation of reports by a number of federal agencies. For Example, the bill:
- Directs the Federal Energy Regulatory Commission to analyze and report on energy consumption in the digital assets industry.
- Directs the CFTC and the SEC to study and report on the development of a self-regulatory organization (SRO) and develop a proposal for its creation.
- Directs the Treasury to study certain topics relating to decentralized finance.
- Directs the FRB to study how distributed ledger technology (“DLT”) may be used to reduce risk in depository institutions.
Other Takeaways and Reactions
- The proposal of a bipartisan bill by two Senators often directly opposed on other issues underscores a potentially significant moment for the cryptocurrency industry. Political donations from the sector have surged, and the bill is supported by a range of stakeholders. Reactions noted in press materials published by the Senators’ offices will undoubtedly skew positive, yet the list of representatives providing statements of support include a broad swathe of stakeholders like trade associations, major industry members, and lawyers.
- It is notable that a majority of the provisions highlighted in the Senators’ press release announcing the bill highlight interagency coordination. This approach aligns with President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, which similarly directed agencies to develop reports and frameworks first before taking immediate regulatory action. One might question, however, whether it is appropriate to introduce proposed legislation of this magnitude before such agency reports have been released.
- In the current Congress, the likelihood of passage is extremely unlikely. The bill may also face opposition from some current regulators such as SEC Chair Gary Gensler, who recently noted his concern that passage of the bill could undermine protections in place in other areas of the capital market and his belief that “[l]ike behaviors should have like treatment.”
- Some commentators have noted that passage of pieces of the bill is more likely given upcoming mid-term election predictions. Regardless, the bill may define the contours of future laws.
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