New bill seeks to regulate cryptoassets in the United States. What does it encompass?

In recent years, the emergence of crypto assets has sparked a worldwide revolution in the realms of finance and technology. These digital assets have garnered immense popularity and hold the potential to transform multiple sectors of the economy, constituting a staggering USD $3 trillion industry at its peak. However, as their adoption continues to surge and platforms utilizing these assets proliferate, the need to establish regulations for crypto assets has been acknowledged by governments across the globe.

An effective regulatory framework for crypto assets is crucial for establishing transparency, stability, and confidence among users and investors. Furthermore, it plays a vital role in preventing financial crimes, including fraud, money laundering, and terrorist funding. Globally, there have been several efforts to establish a regulatory framework for crypto assets, some of which have been successful, as can be seen with the issuance of the European Regulation on Markets in CryptoAssets (“MiCA”), and others not so fruitful thus far, such as the various legislative efforts in Colombia to regulate these assets.

In light of the current landscape, U.S. Senators Cynthia Lummis and Kirsten Gillibrand took a significant step on July 12 by reintroducing the Lummis-Gillibrand Responsible Financial Innovation Act (the “RFIA”). This crypto bill aims to establish a comprehensive federal regulatory framework, fostering a favorable environment for crypto asset companies and investors alike to flourish within the United States. The bill´s primary focus is to safeguard consumers from individuals or entities with malicious intent operating in this sphere.

The senators strongly believe that the absence of a well-defined regulatory framework has resulted in the unguided persecution of crypto asset companies. To address this issue, Lummis and Gillibrand have proposed this legislation which aims to promote flexibility, innovation, consumer protection, and transparency while providing more certainty and clarity to the ever-growing digital asset industry. Although an initial text was introduced in June 2022, the recently introduced RFIA 2023 includes provisions that specifically focus on consumer protection, leadership in the industry, mandatory requirements for Cryptoasset exchange companies, market integrity, and feedback for the U.S Securities and Exchange Commission (“SEC”). Senator Lummis described the bill as a bipartisan framework that would create regulatory clarity for agencies charged with overseeing digital asset markets, provide a robust and customized regulatory framework for stablecoins, and integrate digital assets into existing tax and banking.

The main provisions of the draft are the following:

1. Title I – Definitions: the draft seeks to establish universally accepted definitions. This title includes definitions for digital assets, digital asset intermediaries, distributed ledger technology or blockchain, and smart contracts, among others.
2. Title II – Taxation of Digital Assets: the bill aims to enhance the taxation system for owners of crypto assets by providing small-scale tax benefits and clarifying certain aspects of the federal tax treatment of these assets.
3. Title III – Securities Innovation: A notable feature of the bill is its classification of most digital currencies as commodities rather than securities under the RFIA. This establishes clear guidelines for distinguishing between the two, with the CFTC having jurisdiction over assets and the SEC maintaining mandatory reporting duties.
4. Title IV – Responsible Commodities Innovation: the RFIA introduces a separation between the ancillary asset (commodity) and the underlying investment contract (security). This means that the SEC would continue to have jurisdiction over the investment contract, even if it is related to a commodity regulated by the CFTC.
5. Title V – Responsible Consumer Protection: this title focuses on establishing basic consumer protection rules, particularly centered around the disclosure of information. It also requires digital asset service providers and users to agree on settlement terms for all transactions, while certain providers would be subject to stricter disclosure rules.
6. Title VI – Responsible Payment Innovation: in response to the collapse of several stablecoins, the RFIA addresses crucial issues regarding the regulation of these digital assets. Key measures include obligating issuers to hold high-quality assets equal to 100% of the value of outstanding stablecoins and providing monthly disclosure of information on the backed assets and their value, among others.
7. Title VII – Responsible Baking Innovation: Under the RFIA, the Federal Reserve Board of Governors (the “FRB”) would conduct a study on how distributed ledger technology can reduce risks to depository institutions and would be responsible for issuing routing transit to depository institutions. Additionally, the bill would be the first federal law to codify principles relating to depository institution asset custody.
8. Title VIII – Responsible Interagency Coordination: While the entire bill introduces initiatives for federal agency collaboration, this title deals directly with federal administrative guidance and interagency coordination.

If you would like to learn more about the bill, please contact CMS Rodriguez-Azuero’s legal team.