How the Lummis-Gillibrand Bill could reshape global cryptocurrencies

The long-awaited and long-awaited crypto legislation, the Responsible Financial Innovation Act championed by US Senator Cynthia Lummis (R-WY), was recently introduced as a cross-party proposal co-sponsored by US Senator Kirsten Gillibrand (D-NY). The ambitious and comprehensive bill contains several key pillars – including regulatory oversight, clarification of definitions, taxation, bank- and payment-stable coins – which, if enacted into law, could transform the crypto-world far beyond US borders.

The main focus of the bill is entirely on centralized service providers and incorporating them into existing regulatory structures. The only proposal related to decentralized financial providers is consumer protection and correct disclosure. This is a practical starting point because users of centralized exchanges and platforms are far more than users of DeFi at the moment.

We are reaching dangerous territory, as some crypto platforms abstract risk with smart marketing and beautiful aesthetic design and user experience. Some are even on the verge of misrepresenting digital assets as savings accounts equivalent to US dollars. Today, users are exposed to opaque risks in a troubled environment triggered by BlockFi, Celsius and other troubled CeFi players.

The importance and value of regulatory oversight and consumer protection cannot be underestimated. In an unregulated landscape, consumers have limited information about crypto exchanges or platforms where funds are sent and stored. Without rules and regulations, there is no baseline for safe and sound operation and proper management and control of a crypto exchange or platform.

With regulation in place, consumers will better understand that holding digital assets on a registered digital asset exchange is not equivalent to depositing digital assets on a crypto-lending platform registered off-shore. Second, consumers will better understand that each digital asset exchange or platform has differentiated capabilities in operational and cybersecurity risk management. Third, consumers will better understand how their funds are stored and protected and what legal claims they have on those funds under normal as well as exceptional circumstances, such as when the stock exchange or platform goes bankrupt.

This article highlights key components of this bill and discusses the potential benefits of regulation in light of the recent lurking dangers of the crypto industry. Regulation cannot eliminate risk, but it can mitigate much of it by creating a reliable environment for most risk-averse users.

Clarifying definitions and taxation

The most basic element of the Lummis-Gillibrand bill is to find common definitions for the crypto industry and its ecosystem participants. It will be a crucial moment for the crypto industry when we witness definitions such as “digital asset” and “payment stablecoin” being changed to the US code, the literal books of the law.

We have previously seen how poorly constructed definitions can cause confusion and uncertainty. Senator Lummis previously led the fight over the overly broad definition of “broker” under the Infrastructure Investment and Jobs Act passed in 2021. The law ambiguously sweeps into miners and stakers of digital assets, hardware and software wallet providers and protocol developers as “brokers” . ”Subject to tax reporting requirements from the Internal Revenue Service (IRS). The new cryptocurrency bill seeks to change the definition of “broker”.

Recognition of crypto as an asset class, combined with clarity about taxation and accounting, are necessary building blocks for broader institutional and corporate adoption.

Regulatory supervision

Central to the Lummis-Gillibrand bill is the extension of the regulatory scope to include digital assets and introduce much-needed consumer protection. Regulatory oversight is provided to existing regulatory agencies, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The premise for deciding who has regulatory authority rests on a new and somewhat ambiguous definition of an “additive.” In response to the bill, industry participants are hopeful that most of the best cryptocurrencies by market value will actually fall into the category of additional assets under CFTC supervision.

The CFTC area further expands to regulatory oversight of digital asset exchanges, which will be required to register with the Commission and be subject to rules and standards related to custody, segregation of customer funds, market integrity, margin trading, regulatory reporting, governance, compliance and risk management. It is frankly surprising that the industry, especially crypto exchanges, has grown so large without the kind of rules and standards that apply to traditional financial institutions that hold our money or assets.

The consumer protection component of the bill focuses mainly on the correct disclosure of persons or protocols that offer services for digital assets. Disclosures about products and services, risks, fees, interest rate calculations and re-mortgage policies are common to traditional financial services and should also be necessary for the crypto industry.

Banking and payments

The Lummis-Gillibrand bill lays the groundwork for custodian institutions to issue “payment-stable coins”, formally defined as “redeemable, on request, on a one-to-one basis for instruments denominated in US dollars”. Payment-stable coins must be fully reserved and 100% supported by high-quality liquid assets as defined by the bill or determined by bank regulators. Issuers are required to disclose assets on a monthly basis and are subject to investigation and verification by appropriate banking supervisory authorities.

The proposal for payment stablecoins is largely congruent with the recommendations from the president’s working group report on stablecoins issued in 2021. One of the often cited reasons for PWG’s recommendation is that onerous regulatory compliance requirements would hinder progress and innovation. The bill addresses this criticism by outlining a tailor-made supervisory approach for monoline deposit institutions that exclusively issue stable payment coins. Tailoring requires a simplified regulatory capital framework and a customized plan for resuming or discontinuing operations under stress.

Qualified stack coins issued by regulated custodian institutions give users the choice between operating within a reliable and whitelisted environment. More importantly, the Lummis-Gillibrand bill does not preclude the issuance of stack coins by non-deposit institutions, nor does it prevent developers from making stack coins that are not fully secured. However, the bill will allow users to better distinguish safe and solid stack coins (fully integrated into traditional banking and in accordance with regulatory requirements) from more experimental stack coins.

Conclusion

Due to the laser focus of Sen. Lummis and other lawmakers, we are witnessing a real grip on a comprehensive regulatory framework for crypto in the United States. Being a global leader means that the US framework will serve as a template or guide for other countries and smaller markets around the world. It is crucial that US lawmakers and regulators take a clear and reasonable approach, and the Lummis-Gillibrand bill seems to be doing just that.

The next downturn for the crypto markets will be an order of magnitude more effective than the previous one. Millions of retail accounts are at risk of loss due to the inability to distinguish between the risk of one centralized service provider and the next. Many investors have already suffered staggering losses due to the inability to distinguish the risk of one stackcoin from the other. For these users, regulation is crucial and cannot come fast enough.