What the Proposed Crypto Bill Means For Web3
The Responsible Financial Innovation Act (we’re calling it the Crypto Bill) is the most crypto-favoring proposal coming out of the government. While the assumption was that a bill regulating cryptocurrencies would be in line with the SEC’s aggressive posture, the Crypto Bill, if passed, would be a victory for the crypto industry.
While the Gillibrand-Lummis Crypto Bill focuses on defining and regulating cryptocurrencies, it has far-reaching implications on Web3 as a whole – and not all of them are as clear as the think-pieces suggest.
Let’s dig into what it means:
Setting Clear Definitions for Digital Assets
The Crypto Bill moves to distinguish between digital assets to determine which should be treated as a commodity vs a security. They suggest this is done by codifying the legal precedent under the Howey Test for determining whether a transaction qualifies as an “investment contract” which deems it a security and subject to disclosure and regulation under the SEC.
This requires an examination of the asset’s inherent purpose and the rights/powers given to the holder of the asset. If a digital asset provides the holder with a debt or equity interest in a business entity, liquidation or entitlement to interest or dividend payments from a business entity, a profit or revenue share in a business entity derived “solely from the entrepreneurial or managerial efforts of others,” or any other financial interest in the entity – it is considered a security.
This does not create a clear definition of commodity vs. security: it creates a test that allows in-house teams to make a defensible determination.
Shifting Crypto Regulation from Securities only to a Combination of Securities and Commodities
The proposed bill suggests that most digital assets meet the definition of a commodity rather than a security – including bitcoin and eth. It would allow token issuers to define before launch what they are launching based on the “purpose of the asset and the rights or powers it conveys to the customer.” Under this proposal, more than half of the digital asset market capitalization would fall into a definition as “ancillary assets” which would be overseen by the CFTC rather than SEC, which currently regulates all crypto.
The CFTC Chair, Rostin Benham, made a play for this oversight earlier this year, appealing to Congress to grant his agency authority to oversee crypto spot markets. For those unfamiliar with spot markets, they are either exchange-based or over-the-counter trades where you can only use assets you own – there is no leverage or margin. Spot trading involves directly purchasing or selling financial instruments and assets (crypto, forex, stocks, or bonds) with near-immediate delivery of the asset.
At present, crypto spot markets are largely regulated at the state level with the CFTC overseeing derivative markets such as bitcoin and ether futures and the SEC overseeing tokens considered securities, as well as stocks and funds.
It’s important to note that this bill does not automatically give regulatory control over the CFTC, but still splits the asset regulation based on the definition. It also calls for the creation of a self-regulatory organization that many in the industry have lobbied for after a study from the SEC and CFTC that would lead to a proposal for the SRO. Additionally, crypto operations overseen by CFTC would have to start paying fees to fund the agency.
Regulation of DAOs
The bill specifies that certain DAOs are business entities for the purposes of the tax code. It would also require any crypto platform or service provider to legally register in the United States, be it a DAO or DeFi protocol. This change would curtail anonymous crypto projects – focusing instead on consumer protection language.
While this does not preclude DAOs from existing with incorporation – similarly to people running a business without registering – it creates a clear legal protocol for when they should incorporate.
Protecting Wallet Providers (Sec 803)
The bill endeavors to create liability protection for wallet providers, software developers, minors, and validators by removing them from the definition of “Crypto Broker.” However – it’s important to note this is for non-custodial wallet providers – and may not be extended to custodial wallet companies. In addition, Section 803 suggests that money transmitter regulations should not be applied to “persons or software that engage in the validation of transactions, non-custodial wallet providers, or software or hardware development.”
Consumer Protection via Stablecoin
Likely as a result of the terraUSD collapse, the Bill requires all issuers of stablecoin to maintain high-quality liquid assets valued at 100% of the face value of all outstanding payment stablecoin, combined with public disclosures on how the assets are backed and the ability to redeem all stablecoin at par in legal tender.
The underlying theory: a stablecoin should be stable.
The likelihood of the bill passing remains to be seen, but it’s indicating to the market that crypto is no longer stealth. It’s very much on everyone’s radar.
For the deeply curious – here’s the full text of the bill.