Although the path of cryptocurrency is still emerging, the trajectory of its mainstream acceptance is impressive. A March 2022 survey by NBC News found that one in five Americans have invested in, traded, or used cryptocurrency. However, there remains a lot of uncertainty in the market, in large part because of a lack of regulations and legislation.
This appears to be changing. A comprehensive cryptocurrency bill called the Responsible Financial Innovation Act (RFIA) was recently launched in the Senate, and experts believe that it will have a significant influence on the market. Although a vote isn't expected for some time, it's important to know what led to the bill, what it includes, and what it could mean for the future of crypto.
What Came Before the New Crypto Bill
There has long been discussion about the need for cryptocurrency regulations, both by legislators and industry experts. However, there were very specific events that culminated in the creation of this particular bill.
The Terra Crash
The May 2022 crash of Terra LUNA and TerraUSD (UST) created a sense of greater urgency for legislators working on bills related to cryptocurrency. More specifically, senators Cynthia Lummis of Wyoming and Kirsten Gillibrand of New York specifically referenced the crash as a motivator to move more quickly toward passing regulations that could offer guidance and consumer protection. LUNA and UST rocked the crypto market when they abruptly dropped by 99 percent within 24 hours, wiping out investors' savings in the process. The event raised many questions about the risks of crypto investments and about stablecoins like UST, in particular. The new crypto bill aims to address these concerns head-on.
Previous Crypto Bills
Although Gillibrand and Lummis's bill is the most prominent, it is far from the first cryptocurrency legislation. More than 30 bills were introduced in 2021 alone, but legislators have approached digital currency in a fairly piecemeal fashion. Some bills have addressed crypto regulations, others blockchain applications, and still more central bank digital currency. The RFIA is widely regarded as an important step in that it attempts to more comprehensively define and address multiple issues related to digital currency.
President Biden's Executive Order
One other important precursor to the Lummis-Gillibrand bill occurred on March 9, 2022, when President Biden issued an executive order specifically related to cryptocurrency. Titled the "Executive Order on Ensuring Responsible Development of Digital Assets," the order was more a matter of calling attention to an important issue than offering specific legislative recommendations. Within the order, the president called for a detailed review of the use of digital assets, including cryptocurrencies, and continued research into a U.S. Central Bank digital currency.
What the Bill Includes
The overarching goal of the crypto bill is to make digital assets more usable and accessible for everyday use. It is in many ways a direct response to President Biden's executive order and his clear messaging that the government should become more involved in the process of regulating cryptocurrencies.
One of the most important aspects of the RFIA is that it establishes basic definitions for many of the terms that are key to understanding digital assets and how they can be regulated.
For example, the legislation explores the differences between crypto securities and commodities so that token issuers can know upfront which kind of digital asset they are launching. The bill portrays the crypto market as being dominated primarily by commodities, which affects certain decisions about how digital assets should be handled. Bitcoin, for example, is defined as a commodity.
To determine whether a digital asset is a commodity or security, the bill requires the answers to two questions:
- What is the purpose of the asset?
- What power does it give the consumer?
Based on the bill's definition, many of today's digital assets fall into the category of commodities, which also has an effect on determining which overseeing agency is most appropriate.
More clearly defining the regulatory oversight of cryptocurrency is vital to the success of any regulations. As a natural outcome of defining the majority of the crypto market as a commodity, the bill also assigns the majority of the oversight of cryptocurrency to the Commodity Futures Trading Commission (CFTC) instead of the Securities and Exchange Commission (SEC). As a whole, this is a popular choice within the crypto industry.
The RFIA also shares some similarities with a recent bill proposed by Senator Pat Toomey in that it addresses the importance of developing standardized requirements for stablecoin issuers. Under the new crypto bill, issuers of stablecoins, including banks and credit unions, would be required to maintain high-quality liquid assets that are equivalent in value to all outstanding stablecoins. These holdings would also have to be publicly disclosed. The bill does not, however, require that all stablecoin issuers become depositories.
Decentralized Autonomous Organization
Another important focus of the RFIA is decentralized autonomous organizations (DAOs). These are organizations that are generally controlled by members rather than by a government agency. The RFIA defines them more extensively and creates incentives to incorporate them into the tax code. There are, as with many aspects of cryptocurrency, many questions remaining regarding the laws that would apply to DAOs and who would be responsible for enforcing them, but the content of the new bill is seen as a significant attempt to bring greater clarity to the issue.
Other Significant Points
In addition to oversight, stablecoins, and DAOs, the RFIA also lays out some other key points. These include:
- Making transactions of less than $200 tax-free
- Requiring crypto operations that are monitored by the CFTC to pay fees to fund the agency
- Clarifying the definition of a crypto broker in order to better protect wallet providers and software developers from unnecessary tax reporting requirements
- Calling for a study from the SEC and CFTC and a proposal to create a self-regulatory organization
- Creating an industry sandbox where regulators allow crypto firms to test new products for a limited period of time
- Integrating digital assets into existing banking and tax laws
Although each of these points is included within the crypto bill, it is possible that they will ultimately be altered, removed, or broken out into separate legislation in the future.
What Comes Next for the Crypto Bill
The launch of the RFIA is a major step forward in crypto regulation, but it is not expected to advance quickly. Many legislators are only now beginning to understand the significance of digital assets and the role they will play in the national and global economy. Furthermore, the terminology surrounding cryptocurrency is unfamiliar to many members of the government, so it will take time for them to become well-versed in the industry and the content of the bill.
There are many discussions ahead so that legislators can adjust the key points of the bill to make it practical, realistic, and useful while also allowing for innovation and creativity, which has been the very foundation of the crypto industry. The general expectation is that there will be no movement on the bill until at least next year, and it remains unclear what amendments or alterations might be necessary.
If you are currently involved in the crypto market, it's important to stay up-to-date on legislative developments with the RFIA and any new bills that may be introduced. To learn more about the current state of crypto regulations and how they could affect your business or marketplace, contact the experts at Anterdit.