Senators Cynthia Lummis (R-WY) of the Senate Banking Committee and Kirsten Gillibrand (D-NY) of the Senate Agriculture Committee introduced bipartisan legislation on Tuesday, after months of teasing a new US regulatory agency focused on cryptocurrency.
Even though the 69-page law doesn’t mention NFTs, it does contain important information that will help figure out if a token is a “good” or a “security.”
The terms “digital assets” and “virtual currencies” need to be explained.
In Lummis and Gillibrand’s bill, a “digital asset” is defined as an electronic asset that gives economic or proprietary access rights or capabilities. This includes virtual currency and payment stablecoins.
The law goes on to say that “virtual currency” is a digital asset that is not backed by an underlying financial asset and is used “mainly” as a means of exchange, unit of account, or store of value.
The most common type of cryptocurrency will be “commodities.”
The bill, which is 69 pages long and is called the “Responsible Financial Innovation Act,” encourages “responsible innovation.” Most crypto markets will be regulated by the Commodity Futures Trading Commission (CFTC) instead of the Securities and Exchange Commission’s (SEC) strict reporting requirements and high expectations.
The SEC is still in charge of a wide range of tokens, though. In the bill’s text, “ancillary assets” are described as “intangible, fungible assets that are offered or sold along with the purchase or sale of a security.” This means that digital currencies are “ancillary assets.” Under US law, these extra assets would be called “commodities,” and the CFTC would be in charge of them.
Senators Lummis and Gillibrand’s staff say that the bill treats all digital assets as “ancillary” unless they act like a security that a company would normally sell to investors to raise money, like dividends, liquidation rights, or a financial stake in the issuer.
Companies that want to can sign up to be “digital asset exchanges.”
The bill tries to regulate “digital asset exchanges” by making a distinction between “centralized” and “decentralized” exchanges, but it doesn’t say what a “digital asset exchange” is.
Because of these things, one lawyer argued about whether a decentralized platform is an automated market maker (AMM), a liquidity pool, or a front-end. Brandon Ferrick, the general counsel of Injective Labs, has said that a “internal inconsistency” is when the people who made a project or organization can’t change or affect it on their own.
“So, in the case of a decentralized platform, if the law says that the platform can only show certain…tokens and the person who made and spread it can no longer follow that rule, you’re going to fail every time…
He told The Defiant that it shows that the person doesn’t understand how the technology works.
The stable-coin providers’ reserves must be made public.
This week, the New York State Department of Financial Services released new rules that require licensed cryptocurrency businesses that make stablecoins to have reserve requirements and regular independent audits. This may affect people who already have a BitLicense.
New York’s groundbreaking crypto law, BitLicense, went into effect in 2015. It lets a corporation do Virtual Currency Business Activity with New York or a New York resident.
Lummis and Gillibrand’s plan, on the other hand, says that stablecoin providers would have to tell the public how much cash they have on hand and be subject to regular audits. This might worry Circle and Tether, two of the most popular stablecoin issuers, since they recently said that their products are backed by a mix of cash, cash-like items, short-term securities, and commercial paper.
Lummis thinks that stablecoins would be the first thing in the industry to have full-time audits.
Given that midterm elections are coming up in November, the measure won’t get much support until closer to 2023, but it will still pave the way for stricter regulation.
Because the bill is so big and complicated, lawmakers may have to break it up and pass it in parts, which could include changes that directly address NFTs.
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