What is crypto? Is it something that’s bought and sold like stock in a publicly traded company, or is it a commodity, something that itself can interact with futures agreements? It’s a question at the heart of new legislation that would grant oversight of digital assets to a relatively small regulatory body. This could incentivise even more bad actors to prey on the growing number of U.S. adults who have invested in cryptocurrency.
Senators Kirsten Gillibrand of New York and Cynthia Lummis of Wyoming are calling their bipartisan bill — the Responsible Financial Innovation Act — the first regulatory framework for digital assets. More importantly, however, the two lawmakers claim that “most digital assets are more similar to commodities than securities.”
That definition would put a whole heap of new responsibility on the Commodity Futures Trading Commission, a federal regulatory agency that oversees futures markets. It would mean any “virtual currency spot markets,” as the senators called any real kind of crypto trading, would be under that agency’s purview. This includes the most popular coins bitcoin and ether, which together make up over half of the total crypto market.
This bill would bypass the crypto-conscious and more stringent Securities and Exchange Commission. Why the bill focuses on the smaller agency is baffling, especially considering the CFTC has a $US1.47 ($2) billion budget compared to the SEC’s $US2.51 ($3) billion. The overall worldwide crypto industry is worth over $US1.2 ($2) trillion, and there have been an incredible number of hacks and scams in the crypto space this year alone. The Federal Trade Commission noted it’s getting worse.
The CFTC recently sued the crypto exchange Gemini for allegedly lying to them to set up their crypto futures contract. But even that feels like it has small teeth, being that it’s a civil suit seeking monetary damages for the agency’s own inability to call out the crypto exchange. Meanwhile, the SEC has been buffing the number of staff working on crypto crimes, though even that effort seems small compared to the near-daily influx of new crypto crimes.
Just on Monday, the SEC announced it was investigating whether crypto exchange Binance was selling its BNB token in 2017 before it was registered with the agency, according to a Bloomberg report. Where that investigation would go if it was under the CFTC’s jurisdiction is anyone’s guess.
Who decides if crypto is a security or commodity?
So how did the two senators come to this conclusion that crypto is a commodity rather than a security? The bill claims it uses precedent under the Howey Test to describe crypto as “ancillary assets” which are provided to buyers as effectively intangible assets connected to a purchase. Unnamed senatorial aides told CNBC that the legislation won’t treat digital coins like securities unless they act like dividends or other financial duties or incentives that are issued to corporate investors.
Law professor at American University and crypto sceptic Hilary Allen tweeted Tuesday that “many crypto assets already qualify as securities” but that it tries to offer a “lighter touch” for crypto regulations.
Today, Lummis & Gillibrand launched their "bipartisan" crypto bill. It's bipartisan in the sense that senators from different parties are giving the crypto industry pretty much what it wants, but it doesn't honor the regulatory goals that Ds typically prioritize. A thread.— Hilary Allen (@ProfHilaryAllen) June 7, 2022
SEC Chair Gary Gensler has been openly sceptical about crypto. In April, he said many of these tokens meet the definition of securities. He added that he has asked staff to work with the CFTC to address platforms “that might trade both crypto-based security tokens and some commodity tokens, using our respective authorities.”
To make the regulatory distinction more clear, the bill would need to fully define exactly what digital assets are, but it seems the legislation’s sponsors want to give the crypto companies themselves control of that process. According to the joint press release, the bill would try to create a standard for which digital assets are commodities and which are securities by “looking at the purpose of the product being issued and the rights it conveys the consumer, giving digital asset companies the ability to determine what their regulatory obligations will be.”
At the same time, the bill does introduce multiple stopgaps in the crypto industry, including requiring digital assets that “do not represent securities” to disclose their information with the SEC twice a year. The massive piece of legislation would also create advisory committees to update lawmakers on new technology and force the federal government to analyse the energy and environmental costs of bitcoin mining.
Consistent crypto critics like Ben McKenzie, the former star of The O.C. and Gotham, have pointed out that this bill would make crypto lobbyists happy, and he’s not totally wrong. Blockchain Association executive director Kristin Smith told The Washington Post that this “represents a milestone moment for crypto policy and a major step forward for the crypto industry in Washington.” Other major crypto investors called the bill “a significant and much-needed milestone for web3.”
Crypto lobbyists have put over $US30 ($42) million into federal political campaigns this year, according to a May report by CNBC. Gizmodo has previously reported on the revolving door between federal regulators and the crypto industry. Some tech experts have recently asked politicians to ignore the hubbub and hype and instead take “a critical, sceptical approach” toward crypto. Now that the $US1.2 ($2) trillion crypto industry is finally in the sights of lawmakers, it seems most are buying into the idea that blockchain technology represents an inevitable good.