In the US, the most comprehensive piece of crypto legislation proposed to date

The Securities and Exchange Commission (SEC) would lose authority over regulating a large portion of the crypto market, including the 200 most valuable cryptocurrencies, according to a bipartisan bill introduced on Tuesday by US Senators Cynthia Lummis and Kirsten Gillibrand.

The proposed legislation, titled Responsible Financial Innovation Act, is the most comprehensive piece of crypto legislation proposed to date and introduces a number of other significant measures, including a provision that eliminates the requirement to report crypto gains of $200 or less to the Internal Revenue Service.

The bill has almost no chance of passing in the current Congress. However, it is expected to gain new momentum in 2023 after the midterm elections in November and frame the outlines of future crypto policy. 

Goodbye SEC, hello CFTC

The proposal to end the SEC’s jurisdiction over a large part of the crypto industry is one of the most significant provisions of the bill, coming after years of complaints about the lack of clarity regarding whether cryptocurrencies like Ethereum are securities, which would require them to register with the SEC.

Instead of the SEC, the bill proposes to assign authority over many tokens to another agency, Commodity Futures Trading Commission (CFTC), which oversees commodity trading. A summary of the bill published by Senators Lummis and Gillibrand explains that it gives the CFTC exclusive jurisdiction over the spot market for all fungible digital assets that are not securities, including ancillary assets.

The key term is ‘ancillary assets’, which would be added to the Securities Exchange Act of 1934. According to the summary of the proposal, ancillary assets are those that are not fully decentralized (like Bitcoin), but also do not create rights to profits or other financial interests in a business entity.

According to reports from journalists, people familiar with the drafting of the bill said that this definition would apply to popular blockchain projects like Cardano and Solana, as well as the top 200 cryptocurrencies on CoinMarketCap. However, to be eligible for the definition of ‘ancillary assets’, projects would need to submit periodic disclosures related to issues such as the number of tokens issued and other procedures aimed at increasing transparency.

In another significant section, the summary of the bill explains that it aims to codify the Howey test, a doctrine from the Supreme Court in the 1940s that explains when an asset belongs to the class of securities. According to people familiar with the drafting of the bill, the Howey test clearly shows that cryptocurrencies are not securities, and that the SEC’s interpretation, which states that they are, is incorrect.

Their statement came as an implicit rebuke to the current SEC Chair Gary Gensler, who is extremely unpopular in the crypto community and whom former SEC employees claim has used the agency as a means to advance his political ambitions.

It is unclear whether the language of the bill relating to the Howey test is legally sound or whether, as many crypto lawyers have suggested, most cryptocurrencies fall under securities under the test.

In any case, the bill includes a provision that allows the SEC to challenge labels regarding whether a particular cryptocurrency is a security in federal court.

Finally, if the bill passes and responsibility for the crypto sector primarily shifts to the CFTC, the agency will receive a significant cash infusion, funded primarily by the crypto industry itself, to take on its new responsibilities.

Stablecoins, crypto’s environmental impact, and what lies ahead

The Lummis-Gillibrand bill, spanning 69 pages, also proposes a new approach to regulating stablecoins, a hot topic recently given the spectacular collapse of Terra’s UST stablecoin. That collapse, which wiped out tens of billions of dollars, occurred partly because the Terra blockchain relied on financial engineering tricks to maintain stability.

If Lummis-Gillibrand becomes law, it would require stablecoin issuers to maintain a 100 percent reserve and ensure that stablecoin holders can exchange tokens for an equivalent amount of dollars at any time. It would also open a regulatory pathway for banks and others to issue and use stablecoins for payments.

The bill also addresses another pressing issue, namely the environmental impact of cryptocurrencies. According to critics, activities like Bitcoin mining significantly contribute to climate change as they are energy-intensive. However, instead of imposing restrictions on mining, the bill calls for the Federal Energy Regulatory Commission to conduct studies to explore the environmental impact of cryptocurrencies, as well as the role of renewable energy sources in the industry.

Other major crypto issues addressed by the proposal include the use of crypto in retirement accounts and the creation of a crypto industry group to advocate for certain types of regulations.

However, all of this is largely moot if the bill does not progress in Congress, which has been the fate of past crypto proposals.

Currently, US lawmakers are focused on issues of broad concern such as the war in Ukraine and gun safety laws. In contrast, crypto issues are complicated and niche, according to one observer from Washington. This is one major reason why few expect the Lummis-Gillibrand bill to be passed anytime soon.

Those familiar with the drafting of the bill acknowledged this reality but suggested that the bill will still progress gradually through various committees and be ready for approval in 2023. They added that any final version of the bill will contain significant revisions to the current version.