U.S. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) have introduced the Responsible Financial Innovation Act (also being referred to as “Lummis-Gillibrand”). The goal of the proposal is to create “…complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.” The legislation is noteworthy as a bipartisan effort to apply a clear regulatory structure to digital assets – including virtual or crypto currencies. Currently, regulation of digital assets is a patchwork of federal and state laws and interpretations, most of which have looked to squeeze digital assets into existing regulatory structures, mostly created years before the advent of digital assets.

If enacted, Lummis-Gillibrand should bring some clarity to several areas of current confusion in the digital asset space. The main themes of the proposal center on:

  • Creating common definitions for various digital assets
  • Clarity on the tax implications of digital assets and transactions involving them
  • Bringing more certainty about which digital assets are securities and which are commodities, to support both innovation and regulation
  • Consumer Protection
  • Supporting innovation in the payment and banking spaces
  • Establishing a framework for interagency coordination.

As these themes show, the proposal is an attempt at a comprehensive approach to regulating digital assets and takes on some of the small and larger practical issues that surround digital assets today. Some highlights from the proposal include:

Definitions: The need for common definitions is clear and will make many of the conversations about digital assets less confusing.

Taxation: The proposal would create a de minimus exclusion from taxation of transactions up to $200 in virtual currency used to purchase certain goods or services. This provision will be a change from the current view, that every transaction using virtual currency (including buying a cup of coffee or a sandwich) is the sale of a security and subject to the taxation rules that apply to capital gains and losses. The legislation calls for guidance from the IRS on several issues relating to digital assets, and an analysis from the GAO (Government Accountability Office) about benefits and risks of retirement investing in digital assets.

Securities and Commodities: The US has many regulatory authorities which touch financial services and transactions. The proposal adopts an existing legal test to determine when a digital asset is a security or a commodity; using this approach, many digital assets will be deemed commodities and be principally regulated by the Commodities Futures Trading Commission (CFTC). However, some disclosure requirements relating to some digital assets will be administered by the Securities and Exchange Commission (SEC). The legislation also resolves certain issues about custody of digital assets; provides a process for digital asset exchanges to register with the CFTC; and creates clarity concerning the treatment of digital assets in bankruptcies.

Consumer Protection: To conform digital asset investments with other investments made under US law, Lummis-Gillibrand would require various disclosures in customer agreements and codifies the right for people to keep and control the digital assets they own.

Innovation in Payments and Banking: The legislation seeks to support “responsible” innovations in the payment and banking systems. For payments, the proposal would, among other things, create minimum capital standards for issuers of payment stablecoins, require OFAC to issue guidance for sanctions compliance by such issuers, and authorize the OCC to issue limited purpose national bank charters for issuance of payment stablecoins. For banking, Lummis-Gillibrand would, in part, require the Federal Reserve to study how the potential risk reduction implications of distributed ledger technology, require the FFIEC to establish examinations standards for digital asset activities of banks, and codify common principles relating to asset custody for banks.

Interagency Collaboration: The proposal requires state bank supervisors to adopt substantially uniform standards relating to the treatment of digital assets under money transmission laws (many states require virtual currency exchanges to obtain a money transmission license), directs the CFTC and SEC, in consultation with the Federal Reserve, to develop guidance related to cybersecurity for digital asset intermediaries, and establishes an Advisory Committee on Financial Innovation composed of government, technology, and consumer protection experts.

What a final law may look like is speculative at this point. Lummis-Gillibrand has the advantage of being bipartisan; whether the bargaining strength and leverage of the senators is sufficient to overcome the deep-seated interests of traditional financial service providers, the FinTech community, and the possible turf battles among the various regulatory agencies and their champions in Congress, remains to be seen.

What is clear, is that a consistent, national structure is certainly better than the lack of clarity that exists today.

Has the time come for adoption of digital asset legislation in the US? I don’t know, but I hope so.