Key highlights of the Lummis-Gillibrand bill
The sprawling nature of the bill shows a thoughtful and nuanced understanding of several key features that are unique to the nascent industry, which needs a level of regulation yet also needs room for innovation.The bill in its current form strives to balance several competing priorities while providing workable solutions on many points, which include:
- The IRS classifies cryptos as property, which means that transactions occurring on cryptocurrency exchanges result in a capital gain/or loss. Prior to Lummis-Gillibrand, any exchange of a crypto or token for any type of goods or services triggered a capital gain. The new proposal eliminates any tax on small transactions up to $200 to spur crypto use.
- The bill also establishes a clear standard for determining which digital assets are commodities and what types are securities. Under the bill, cryptos such as Bitcoin and Ethereum, as well as many others, would be classified as commodities by looking at the purpose of the asset and the rights or powers conveyed to the consumer. As commodities — not securities — those digital assets would be regulated by the Commodity Futures Trading Commission (CFTC), as would spot exchange traded funds (ETFs) which would be significant drivers of mainstream adoption.
- In light of the recent TerraUSD stablecoin meltdown, Lummis-Gillibrand establishes a 100% reserve for stablecoins, ensuring holders can redeem those cryptos for the pegged asset at any time. The bill also creates a detailed, optional framework for all banks and credit unions to issue payment stablecoins of their own.
- Interestingly, the bill requires the CFTC and Securities and Exchange Commission to research and report on the possible creation of a self-regulatory organization (SRO) for the crypto industry and develop a proposal for establishing such a body. Both agencies would also have to consult with the Treasury and the National Institute of Standards and Technology to develop comprehensive guidance regarding cybersecurity and cryptos.
- The bill also mandates the Federal Energy Regulatory Commission to analyze and report on energy consumption within the digital assets industry.
- Lastly, the proposed legislation requires the Government Accountability Office (GAO) to conduct an analysis of the risks and opportunities associated with investing retirement savings in digital assets and to report its findings to Congress.
Tax benefits for crypto users
Tax filing for crypto users can be extremely onerous, and Gillibrand and Lummis’s bill attempts to help ease those difficulties. It stipulates that buying goods or services under $200 with crypto no longer necessitates filing a report to the IRS, which would make it easier to buy a coffee with Bitcoin, for instance. The bill also walks back a provision in last year’s infrastructure bill that hit crypto miners with heavier taxation.
While these moves were hailed by crypto users, Omri Marian, a professor of tax law at University of California, Irvine School of Law, wrote on Twitter that the bill “gives crypto a tax preference that no other asset has.”
Last month, the collapse of the UST stablecoin—which was supposed to hold a dollar peg but has dropped to one cent in value—raised many concerns about riskier stablecoin models (including algorithmic ones like UST) and how they should be regulated. The bill hopes to assuage some of those fears by creating an oversight framework for stablecoins (although, the term “algorithmic stablecoin” isn’t even mentioned).
The bill calls for stablecoin issuers to prove that they’re backed by U.S. dollars, and to be able to reimburse their users in full at any given time. It also gives power to the U.S. Treasury to ensure that stablecoin issuers comply with sanctions. Cody Carbone, the director of policy at the DC-based crypto lobbying group Chamber of Digital Commerce, told TIME that the bill outlines “the proper controls and audits we need to make sure that [stablecoins] are safe and usable.”
Studies on energy and 401(k)s
The bill also mentions two areas of crypto that have been hotly contested recently: crypto’s impact on the environment and its potential inclusion in retirement accounts. First, the bill asks the Federal Energy Regulatory Commission to lead a report on cryptocurrency mining, which wasjust halted in New York State after a fierce debate. The bill also asks for a government watchdog to look into the risks and opportunities of allowing employees to invest in crypto with their 401(k) retirement accounts, which has been criticized by the likes of Senator Elizabeth Warren.
CFTC, take the wheel
At the moment, several governmental agencies are jockeying for control over crypto, including the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). SEC Commissioner Gary Gensler, who has spoken critically of crypto over the years, has argued that most cryptocurrencies meet the definition of a security, which would put them under his domain. Under Gensler’s tenure, the SEC has taken action against some significant crypto projects—including the currency Ripple and the lending platform BlockFi.
Gensler’s tactics have frustrated many crypto insiders. The solution to this problem, many of them feel, is for cryptocurrencies to be regulated by the CFTC, which is smaller and has been friendlier to crypto in the past. Similarly, this bill aims to give them, not the SEC, more power— by defining most currencies as commodities, much like wheat or oil. Any cryptocurrency hoping to be registered as a commodity would have to be sufficiently “decentralized,” although that descriptor is fairly murky.
Marking cryptocurrencies as commodities would theoretically open the door to much faster growth, and it would pave the way for a bitcoin ETF (exchange-traded fund), which would allow less technically-sophisticated investors to jump into crypto. But critics worry that the CFTC doesn’t have the ability to combat the space’s fraud and bad actors. “Giving the CFTC jurisdiction over crypto is like New York City outsourcing crime fighting to a small-town police force,” Dennis Kelleher, a co-founder of Better Markets, a financial reform advocacy group, told CNBC.
However, a CFTC-controlled crypto community won’t mean a complete free-for-all. Just last week, the agency sued the major crypto exchange Gemini, accusing them of lying to regulators.
Reactions to the bill
The bill’s announcement provoked a mix of reactions from both inside and outside the crypto community. Hilary Allen, a prominent crypto skeptic and a professor at American University Washington College of Law, wrote on Twitter that the bill gives “the crypto industry pretty much what it wants, but it doesn’t honor the regulatory goals that [Democrats] typically prioritize. ” She expressed concerns about the lack of cybersecurity stipulations in the bill, writing: “What about testing the software for basic quality control/fitness for purpose? We do this for aviation software —we should do the same if our financial system is going to run on it.”
On the opposite end, the bill also faced some wariness from crypto enthusiasts. Adam Cochran, who runs the venture fund Cinneamhain Ventures, believes that the bill’s passage would lead to “significant growing pains.”
“Right now as written, a lot of the compliance standards are cumbersome and costly. They’d put undue burdens on emerging startups, smaller players and international entities that would squeeze out competition in the space,” he wrote in an email to TIME.
Carbone, at the Chamber of Digital Commerce, disputed this characterization, arguing that the bill would “give a path to some of our innovative experiments to really grow.” Carbone says the Digital Chamber was highly active in drafting the bill, calling it a “collaborative effort with those two offices and the industry in writing this thing.”
While Carbone and the rest of the Digital Chamber have high hopes for the bill, it’s highly unlikely to be passed any time soon. The bill will have to clear at least three different Senate committees before being brought up for a full chamber vote. There’s a possibility it could be broken into smaller bills. And the arguments from those inside and outside of the crypto community will only grow louder and more contentious, especially if the crypto economy continues to slide.
Nevertheless, the bill’s introduction serves as a major landmark for an industry trying to grow out of its Wild West phase. “We’re extremely excited,” Carbone says. “It’s a large bill, and it’s a beast: it covers almost all aspects of the digital asset and blockchain industry. It’s not the final step in getting sound, balanced clarity in this space, but it is a great first step.”