On Tuesday, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY), introduced the Responsible Financial Innovation Act, aimed at — finally— creating a real regulatory framework for digital assets. The senators stated in their press release that the goal of the legislation was to encourage “responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.”
This is a laudable goal. And painfully overdue.
But as with any legislation—especially a groundbreaking bill in a fast-changing part of technology—it’s very tough to assess this proposal’s strengths. We read the entire 69-page bill. And there’s even a helpful 6-page summary. To our eyes, this proposed legislation is a rock-solid start that offers the first real clarity on the core “security vs commodity” uncertainty that has throttled development and possibly cost America its lead in fintech innovation.
The fact is, these tokens trade like commodities. It’s increasingly clear that the CFTC should regulate this market. So it’s encouraging that this legislation pushes in that direction and would, as CNBC put it, “empower the Commodity Futures Trading Commission.”
Clearly, consumers need to be protected and a tailored disclosure regime could conceivably work. The SEC could play a meaningful role here. At the same time, Congress mustn’t give the SEC the opportunity to overreach with a disclosure regimen that continues to confuse and smother an industry that, by all rights, America should be leading.
Modern Consensus spoke with Sen. Lummis staffers on Thursday afternoon, as well as staffers for other Senators to get a picture of where the bill stands and a timeline for its possible landing on President Biden’s desk.
“The United States is the global financial leader,” Sen. Lummis said in her statement. “To ensure the next generation of Americans enjoys greater opportunity, it is critical to integrate digital assets into existing law and to harness the efficiency and transparency of this asset class while addressing risk.”
Sen. Lummis, who serves on the Senate Banking Committee, pointed to the rather forward-looking legislation coming out of Cheyenne as a model for Washington, DC.
“My home state of Wyoming has gone to great lengths to lead the nation in digital asset regulation, and I want to bring that success to the federal level. As this industry continues to grow, it is critical that Congress carefully crafts legislation that promotes innovation while protecting the consumer against bad actors.”
In other words … Lummis gets it.
Sen. Gillibrand is just as strong in her advocacy here, which is why the whole thing feels like a well thought through and comprehensive approach, rather than the strange patchwork of rules we’ve seen to date. In her post on Medium explaining why now and why this, New York’s junior senator wrote that the bill will “Assign regulatory authority over digital asset spot markets to the CFTC.” Gillibrand goes on to state plainly that “most digital assets are more similar to commodities than securities, [so] the bill gives the CFTC clear authority over virtual currency spot markets, which aligns well with its current purview over other commodity markets. Digital assets that meet the definition of a commodity, such as bitcoin or ether, which comprise more than half of digital asset market capitalization, will be regulated by the CFTC.”
The bill deals with assigning CFTC primary responsibility here by specifically designating the CFTC as the crypto’s primary spot market regulator.
Digital assets are traded on exchanges at a massive scale. CFTC oversight of this trading makes perfect sense, since its only real analogy is to spot trading of commodities. Introduced earlier this year, the Digital Commodity Exchange Act (DCEA), which also seeks to modify the 1936-written CEA, already has bi-partisan support—and support in both houses of Congress—and would essentially solve this issue.
Section 403 grants the CFTC exclusive spot market jurisdiction over all fungible digital assets that are not securities, in addition to the agency’s current jurisdiction over leveraged transactions. This is similar to the Digital Commodity Exchange Act (H.R. 7614) currently being considered in Congress.
Some in the media have portrayed the DCEA as an invitation for light-touch regulation. That is a false narrative. The CFTC has proven itself time and again as a robust markets regulator equipped to protect market participants from fraud, manipulation, and abusive practices. And its teeth have actually gotten sharper in recent years.
According to agency data, “During fiscal year 2018, the CFTC filed 83 enforcement actions, a 22% increase on 2016 and a 20% increase on 2015. … Monetary penalties totaled around $900 million in 2018, higher than five of the eight years from 2009 to 2016.”
Another misconception about DCEA is that it excludes a meaningful role for the SEC. That’s not true, and the fact that SEC would still play a meaningful part will hopefully allow this bill to end the interagency turf war that has so far paralyzed meaningful action in the space.
In fact, DCEA recognizes that the SEC will be the regulatory gatekeeper to the extent any newly issued asset represents a right, title or interest in a company or the profits of the issuer. But for the billions of dollars in daily trading volume that is already occurring on these exchanges, the answer should not be the opaque approach that the SEC has been pursuing. And pursuing unevenly.
The uncertainty that’s been created by the SEC’s “regulation by enforcement” has created unsustainable market uncertainty and sent fintech innovators overseas. People looking to buy and sell these assets have a right to know that doing so is legal. As every legit company in this space has indicated, the only thing more toxic than heavy handed regulation is “no regulation.” This bill solves for that.
This is a serious, thoughtful proposal from two Senators who have clearly taken the time to get their arms around incredible complexity. This week, America has shown the world what it looks like when government fails to function. It’s not pretty. Let’s hope the full Congress takes this opportunity to show the American people what it looks like when thoughtful, comprehensive, bi-partisan legislation sets a course for how our country will move forward.