3 Bills Promoting Clear Crypto Regulation
By Tobi Oluyede September 6, 2023
- Regulatory frameworks are seen as essential for healthy growth in the crypto markets, providing a more stable environment for investors
- Several bills have been proposed in Congress to improve crypto regulation
- These bills aim to define regulatory jurisdictions, protect consumers, clarify taxation and create a secure framework for digital assets
- This could potentially attract more institutional interest in cryptocurrencies, though the effectiveness of these remain uncertain
Regulatory frameworks might foster healthy growth of crypto markets. The crypto regulation narrative is indeed a utopian ideal. But now, there seems to be some fresh hope for crypto investors and enthusiasts interested in regulation of the wild wild west of finance.
Traditional hedge funds and asset management firms appear to be falling in line, with BlackRock, Fidelity, Schwab, and Citadel all recently announcing applications for crypto-backed ETFs. For institutional investors to push for crypto adoption, there's still a way to go in the area of regulatory oversight. The SEC has rejected several ETFs. And in just over a year, there have been around 50 digital asset bills submitted to Congress, aiming to govern everything from stablecoins to the jurisdictions of US regulators.
However, experts have highlighted a few bills that could potentially improve the state of regulation if they pass into law.
Financial Innovation and Technology for the 21st Century Act
The "FIT" bill represents a major step in the push for healthy regulation of the US digital assets ecosystem. The Financial Services and Agricultural Committees of the US House submitted the bill to establish a solid backdrop on which the global crypto regulatory ecosystem can build upon.
The bill, introduced in July 2023, defines guidelines for financial watchdogs like the SEC and CFTC to better define their jurisdictions. More specifically, the bill calls for a clearer understanding of emerging technologies through year-long studies, particularly on "non-fungible digital assets" (NFTs) and "decentralized finance" (DeFi).
Bored Ape Yacht Club NFT floor prices since 2021. Source: CoinGecko
In the opening draft of the bill, the definition of digital asset includes "any fungible digital representation of value," clearly excluding non-fungible assets. The decentralized finance landscape shall be studied by the CFTC and SEC, while the NFT asset class will be studied independently. Both regulators will also conduct a joint study to assess whether additional guidance is needed in tokenized securities and derivatives.
This would help determine whether those rules would ensure the development of fair and orderly financial markets, and contribute to investor protection.
Responsible Financial Innovation Act (RFIA)
The RFIA ( aka "Lummis-Gillibrand" bill ) was drafted "to provide for consumer protection and responsible financial innovation to bring crypto assets within the regulatory perimeter". This new bill aims to enforce consumer protection through provisions for preventing exit scam events similar to the FTX debacle.
The Lummis-Gillibrand bill clarifies the stance on digital asset taxation, ordering the Federal Reserve to process bank applications for master accounts for crypto firms on a fair basis. The number of crypto-friendly banks remains sparse and it's still hard to open a crypto bank account. This would improve the image of crypto assets in the eyes of banking institutions.
Also, financial institutions would be sole issuers of stablecoins, leaving room for DAOs in the tax code and an advisory committee along with regular reports on the industry.
Currently, there is no definite approach to regulating DAOs and their treasuries, the downside of the policy is that DAOs may easily seek out conducive tax havens overseas. There are thousands of DAOs with billions in valuation, so regulation is mandatory to protect stakeholders' interests.
A positive taxation policy would help the US ensure a large, growing investment area.
Digital Commodity Exchange Act (DCEA)
The DCEA , originally introduced in 2020, provides clarity and certainty to the digital commodity marketplace by creating an orderly and secure regulatory framework. The bill was updated in April 2022, with a new directive qualifying stablecoin providers as "fixed-value digital commodity operators" with comprehensive auditing and reporting requirements.
The Digital Commodity Exchange Act's new framework is rooted in the Commodity Exchange Act (CEA), which the CFTC has used to regulate the commodity derivatives markets for decades. The DCEA provides digital commodity trading platforms with federal licenses instead of obtaining multiple money transmitter licenses across states. This approach enables state and federal financial regulators to supervise digital commodity custodians.
The act also empowers the CFTC to register and regulate spot trading platforms, bringing them under the same rules as other commodity exchanges. Cryptocurrencies not considered securities are labeled digital commodities under the CFTC's purview, while the SEC would handle crypto securities offerings.
Under the directive, crypto projects could also voluntarily register with the CFTC by submitting disclosures required to publicly trade and list their assets on an exchange.
Although the introduction of these bills holds great potential for transformation, it remains to be seen how key stakeholders in the crypto industry will respond to the recent developments. Ripple's SEC victory indicates that adopting a flexible win-some-lose-some mindset might be the way forward.
Ripple Labs' XRP price over the past year. Source: CoinGecko
Obviously, the goal is not to evade the SEC's claws — or CFTC's, for that matter — but rather to proffer unbiased ways to regulate that favor compliance and put a check on rule-breaking. Although it seems like a compromise, it may be a wise move since congressional legislation seems more lenient than the SEC's existing stance.
The US remains a focal point in the ongoing financial revolution, and other countries would be sure to follow if these bills can lay a solid groundwork. This would attract continued and perhaps growing institutional interest in cryptocurrencies.
Now for the million-dollar question: Are we ready?