Welcome to our new series, Node Notes, where we’re spotlighting topics from our bi-weekly research piece, The Node Ahead. If you want to read the full piece, you can check out our blog or sign up to receive The Node Ahead straight to your inbox. This edition of Node Notes is an excerpt from Node Ahead 48.
Senate Bill 2.0
In our July 5th newsletter, we covered the new Market Structure Bill drafted by House Republicans that aims to provide regulatory clarity regarding the classification of cryptoassets. That bill was approved by both the House Financial Services Committee and the House Agriculture Committee making this the first crypto-specific bill that has been advanced on its own rather than part of broader legislation. The bill now moves to the House floor. Although passing this initial vote is just the first step, it’s definitely an encouraging development.
But the House bill wasn’t the only positive step for crypto regulation. Soon after the draft of that bill was released, we got another draft bill introduced, this time from the Senate. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) re-introduced The Responsible Financial Innovation Act, a bi-partisan crypto bill that was first introduced back in June of last year. At the time, it was the first-ever attempt by Congress at a comprehensive piece of crypto regulation. Due to the midterm elections, the bill never really gained any momentum within the Senate. The appetite and motivation within Congress to pass a crypto regulatory bill are very different than a year ago, and the revamped version of the bill is now being re-introduced to the Senate.
The highlight of the bill is the clear distinction of oversight authority between the SEC and CFTC. The bill introduces the concept of ancillary assets—intangible, fungible assets that would be treated as commodities, thus putting most cryptoassets squarely under the purview of the CFTC. Those issuing cryptocurrencies would be required to make disclosures to the SEC twice per year, but as long as their tokens don’t represent debt or equity, they would largely stay outside the jurisdiction of the SEC.
The bill also includes strong consumer protections, mandating segregation of customer funds and periodic reporting of proof of reserves. We covered the benefits of Proof of Reserves back in March, but as a quick refresher, it’s a method of proving on-chain that a service’s assets match its liabilities. Proof of reserves makes it impossible for any service dealing in crypto assets to conceal insolvency issues or misappropriation of funds over a period of time (as in the case of FTX and others) by forcing the service to prove on an ongoing basis that assets match liabilities. Furthermore, since proof of reserves is a public attestation, anyone can verify its accuracy. This is a unique feature of blockchains and should be taken advantage of to improve compliance.
Another major significance of the bill is that it would mandate that stablecoins could only be issued by banks or credit unions regulated by the state and federal governments. It would, however, establish a new charter through the OCC for private companies (such as Circle, which issues USDC) to receive a license to also be a stablecoin issuer. All stablecoins would have to be backed 1-to-1 by “high-quality, liquid assets” (most likely a mix of dollars and US treasuries).
Lastly, there are a number of new tax treatments the bill addresses. The bill holds crypto to the same wash-sale tax restrictions that are in place for securities, meaning a taxpayer can’t benefit from crypto losses if they happened from a sale that’s quickly followed by the repurchase of the same asset. But it also includes some significant tax benefits for crypto investors, including the provisions regarding rewards earned from mining, staking, forks, and airdrops. Also, any transaction under $200 gets a tax exemption – an idea that could pave the way for cryptoassets to be used as a medium of exchange without incurring tax complications.
The Senate’s 50-50 party divide and the fact that the ranking Banking Committee Chair Sherrod Brown openly opposed the bill last time around means this bill has an uphill climb in order to get passed. However, this bill was drafted by members of both political parties, was designed to be a middle ground in hopes of finding a wide range of bipartisan support, and there appears to be more motivation than ever before from both sides of the aisle to get something passed. Even if this bill isn’t passed, it’s very possible that parts of this bill get absorbed into other bills, possibly into the Market Structure Bill originating from the House.
Similar to the bill in the House, this newly reintroduced bill in the Senate further undermines the SEC’s lawsuit against Coinbase and Binance because it reaffirms once again that Congress believes the existing rules in place are not sufficient or clear.
The good news is that we now have not one but two bills currently introduced in Congress. Either bill would be a huge positive step forward for the crypto industry in the U.S. as it would provide the clarity needed for existing companies, entrepreneurs looking to build new businesses, increased capital formation in the space, and an overall more competitive dynamic for the American economy compared to other parts of the world. Both bills undermine the SEC’s recent legal actions and stand to significantly reign in Gensler’s ability to sue whichever company he wants arbitrarily. For years the regulatory environment in the U.S. was opaque, and since FTX, it shifted to outright hostile. Now the winds seem to be shifting for the better, which could further drive adoption within the U.S.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.