The latest crypto bill introduced to U.S. congress can potentially bring much-needed clarity to Bitcoin and Ethereum. Could that clarity be a bad thing for altcoins?
Covered:
- New Bi-Partisan Bill Introduced By US Senators
- How This Bill Could Help Bitcoin And Ethereum
- If This Bill Passes, Are Layer-2s In Trouble?
New Bi-Partisan Crypto Bill Introduced By US Senators
Today, I’m introducing the Responsible Financial Innovation Act alongside @SenGillibrand. The United States is the global financial leader, and it’s absolutely critical the U.S. plays a leading role in this new frontier. https://t.co/PziuTwn8Wd
— Senator Cynthia Lummis (@SenLummis) June 7, 2022
U.S. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced a bi-partisan bill to congress today that proposes a regulatory framework for crypto. The bill titled, “Responsible Financial Innovation Act” will provide guidance for digital assets (a.k.a. crypto) in order to balance financial innovation with consumer protection. More importantly, it will define a standard for what makes a digital asset a commodity or a security.
“Digital assets, blockchain technology and cryptocurrencies have experienced tremendous growth in the past few years and offer substantial potential benefits if harnessed correctly. It is critical that the United States play a leading role in developing policy to regulate new financial products, while also encouraging innovation and protecting consumers,” said Senator Gillibrand.
The 69-page bill — which was first announced back in March of this year — proposes to integrate digital assets into existing law as opposed to creating an entirely new framework for the asset class. Previous bills have proposed to consider digital assets as distinct from securities or commodities because digital assets don’t fit neatly into a framework designed many years before the advent of crypto.
So far, Bitcoin and Ethereum have been classified as commodities. The Commodity Futures Trading Commission (CFTC) currently regulates the crypto futures markets while the SEC has approved a Bitcoin Futures ETF. The bill promises to clear up jurisdiction issues between the two agencies.
Not to mention, the bill would free up Bitcoin to be used more often as a currency — it’s currently used most often for speculative purposes. As Namcios, a writer for Bitcoin Magazine points out, the bill “provides a tax exemption for transactions of up to $200.” This means selling Bitcoin won’t be considered a taxable event in the way selling a security is freeing it up to be used for small purchases.
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Why This Crypto Bill Could Help Bitcoin And Ethereum
Most of the crypto industry has sought clarity from the U.S. government for years to no avail. The lack of clarity has led many crypto startups to open up shop internationally. The misconception is that projects have done so to shirk taxes, however, as we’ve seen with the actions against XRP, developing projects within U.S. borders exposes protocols to unnecessary legal issues that stunt development.
The bill will hopefully encourage more development by applying the Howey Test. The Howey Test seeks to define if a transaction is an “investment contract” and thus subject to disclosures and registration with the SEC. Moreover, it considers investment in a “common enterprise,” or in other words, a business, as a security as well.
Under this definition, Bitcoin passes the Howey Test easily. First of all, Bitcoin purports itself to be a currency of the digital variety. In addition, it didn’t have an Initial Coin Offering (ICO). An ICO works similarly to IPOs offered by publicly traded companies. However, publicly traded companies need to file with the SEC to offer an IPO.
This doesn’t mean layer-1 smart contract protocols like Ethereum are in trouble. Ethereum doesn’t qualify as an enterprise or company — and not just because it’s led by a “foundation.” Ethereum, in effect, is a currency to be used by companies/enterprises that build on top of Ethereum. Sure, it had an ICO, but that ICO provided investors a currency that can be used for programs developed on Ethereum, rather than stock in a company with expected future earnings.
For the most part, layer-1 projects that offer a digital currency like Bitcoin, or a digital currency to be used by protocols built on top of their platform, should have no issue qualifying as a commodity.
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If This Bill Passes, Are Layer-2s In Trouble?
Translation: “We will write into law that everything other than bitcoin and ethereum is a security,” #stopthesecurityfactories
— Luffy (@XRPLuffy) June 6, 2022
Altcoin enthusiasts took to Twitter immediately after the announcement assuming that Senator Lummis, a staunch Bitcoin supporter, would produce a bill that would “pick winners and losers.” Is it justified?
At first blush, this bill could potentially lead to issues for certain layer-2s because unlike Bitcoin, many layer 2s run themselves like dotcom startups with founders and VC capital flying around. However, as Namcios points out to be considered a security, a digital asset “must provide the holder with a debt or equity” and derive benefit from “entrepreneurial or managerial efforts”. Even if digital assets are run with an entrepreneurial intent, similarly to how publicly-traded companies are run, said assets don’t qualify as a security as long they don’t offer the right to profit in exchange for an investment.
For example, a protocol can have a corporate structure with management and staff while also offering a token, as long as that token doesn’t offer the right to profit in the way a traditional share of a company does. Company shares, for example, can (though, are not obliged to) provide the right to profit via dividends. In addition, the right to profit doesn’t guarantee returns, though, if a company goes out of business, the remaining assets of the company can be used to repay shareholders.* Under the definition of what is right to profit, something like staking wouldn’t be considered as such. Staking offers rewards for voluntarily using the currency to power the network.
5/…To be classified as a security, the digital asset must provide the holder with a debt or equity interest in a business entity, liquidation rights or entitlement to interest or dividend payments from a entity, profit or revenue share in an entity…
— Namcios (@namcios) June 7, 2022
Under the bill, layer-2s can file disclosures with the SEC twice a year to ensure they meet those requirements.
Another important point: this bill would ensure that a digital asset is considered a commodity until proven guilty. “The presumption that an ancillary asset is a commodity can be appealed in court. So if the SEC wants to claim that a given digital asset is a security and not a commodity, it needs to go to court,” Namcios said via Twitter. This, by defacto, gives a lot of power to the CFTC — crypto friendly agency. This bodes well for Bitcoin, Ethereum, and many other crypto projects — despite what Senator Lummis’ mentions might make you think.
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*It’s unclear, but based on this bill, it appears Terra’s community would not have a legal case for the remaining assets of LUNA.
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