What the Lummis-Gillibrand bill means for US crypto regulation

A bipartisan bill introduced in the  Senate plans to create a comprehensive regulatory framework for digital assets in the United States. Sponsored by Senators Kirsten Gillibrand of New York and Cynthia Lummis of Wyoming, the 69-page bill, known as the Responsible Financial Innovation Act, addresses the jurisdiction of the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), tax treatment of digital assets, stablecoin regulation, and interagency coordination.  

The proposed bill set out guidelines for categorizing cryptocurrencies as either securities or commodities. Described by Gillibrand as a “landmark bill”, the proposal aims to provide clarity for regulators and the industry as a whole, while delivering the flexibility necessary to operate within the fast-changing virtual asset space. 

In a move seemingly designed to encourage the adoption of crypto as an alternative form of payment, the bill recommends making crypto transactions that are $200 or less tax-free, subject to certain conditions. 

To aid innovation, the bill also suggests introducing an industry “sandbox” where regulators allow crypto firms to test new products on a supervised, limited scale and duration. 

Crypto classifications

The decision to define most cryptocurrencies as either commodities or securities is based on the “purpose of the asset and the rights or powers it conveys to the consumer.” The bill also clarifies the definitions of various industry-related terms, including “crypto broker”, “digital asset”, “commodity”, “security”, “payment stablecoin” and “ancillary asset”. 

The bill argues that the crypto market is dominated by commodities – a fungible or tradable asset that represents an item or product – due to them being “fully centralized”. As a result, many of the cryptocurrencies with the largest market share, including bitcoin and ether, would fall into the category of “ancillary assets” overseen exclusively by the CFTC. 

A regulatory framework for stablecoins 

The bill also defines and creates requirements for stablecoins designed to protect consumers and markets and promote faster payments. Senators Lummis and Gillibrand maintain that a stablecoin holder should always be able to redeem the stablecoin in exchange for the equivalent dollar value, which not only ensures its value is maintained but also protects consumers from many of the potential risks associated with stablecoins. 

In light of the recent collapse of terraUSD (UST), the bill examines a move toward a “100% reserve, asset type and detailed disclosure requirements for all payment stablecoin issuers.” The bill proposes a new framework whereby credit unions and banks could issue stablecoins, but issuers would not have to become depository institutions. This proposal reflects the topic of debate around stablecoin regulation that remains strong in the US, which was recently seen in a report from the President’s Working Group on Financial Markets (PWG) that urged Congress to act promptly on such regulations.

Key takeaways

Compliance staff should note that a lot could change within this bill before it becomes law. But, if passed, the Responsible Financial Innovation Act could establish a new, comprehensive regulatory framework for the crypto industry in the US. It could also influence approaches to regulation in markets around the world if policymakers globally see opportunities to harmonize their approaches.