In the wake of the White House’s release of their Comprehensive Framework for Responsible Development of Digital Assets, which made a number of recommendations for congressional action, much of the crypto policy focus in Washington has now turned to a few key bills on the Hill. The top issues at hand are:
- Regulatory clarity and additional oversight authorities for the Commodity Futures Trading Commission (CFTC)
- Stablecoin regulation
- Tax clarity
- National security issues
With the midterm elections less than a week away, Congress is in recess right now. However, before members recessed, there were a number of bills actively debated and discussed.
Let’s dive into the various bills at hand, what they do, and what we might expect from Congress in the coming months or in the soon-to-be-elected 118th Congress.
The Lummis-Gillibrand bill
In June 2022, Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) introduced S. 4356 – the Responsible Financial Innovation Act (RFIA). This bill outlines a comprehensive regulatory framework for digital assets that attempts to address a number of the key issues (a section-by-section summary can be found here). To name a few:
- It makes a distinction between digital assets that are commodities or securities and would grant the CFTC exclusive spot market jurisdiction over all fungible digital assets which are not securities (more on this later).
- It also includes tax provisions that clarify definitions and provide a de minimis exclusion of up to $200 per transaction from a taxpayer’s gross income for use of digital assets for payment for goods and services.
- It provides guidance around digital asset issuer and provider disclosures.
- It would subject stablecoin issuers to new prudential financial regulations.
- It would categorize decentralized autonomous organizations (DAOs) as business entities for purposes of the tax code.
- It also calls for a number of studies on distributed ledger technology use by depository financial institutions, decentralized finance (DeFi), energy consumption in digital asset markets, and self-regulation, among other things.
Sens. Lummis and Gillibrand have said that this legislation was meant to kickstart the conversation about crypto regulation and policy in Washington. They see great promise in cryptocurrency and web3 technology, but worry that events in the crypto ecosystem (including the collapse of the algorithmic stablecoin TerraUSD and the prevalence of scams and exploits in some areas) have underscored the need for increased oversight and consumer protections to ensure that Americans can safely participate in the crypto ecosystem.
This brings us to a number of more narrowly-tailored bills Congress is considering…
Regulatory clarity and CFTC oversight authority
There are several bills in the House and Senate that would provide the CFTC — which regulates the U.S. derivatives markets, including commodity futures, swaps, and certain kinds of options — with additional oversight authorities in this space. Currently, the CFTC has authority over the futures markets and also fraud and manipulation authorities, but they need Congress to act in order to provide them the spot market. Also referred to as “cash markets” or “physical markets”, spot markets are where trades are swapped for an asset immediately, rather than based on a future date, such as in a futures contract.
There are several bills before the House and Senate agriculture committees that would provide the CFTC with spot market authority over cryptocurrency commodities. Before we dig into these bills, why, you ask, are the agriculture committees involved in crypto legislation? It has nothing to do with yield farming (apologies for the crypto dad joke) but rather is because the agriculture committees have oversight over the CFTC due to their role in regulating more “traditional” commodities markets, like corn, oats, soybeans, and wheat. Now these committees have taken on cryptocurrencies in addition to these legacy commodities.
- In April 2022, H.R. 7614, the Digital Commodity Exchange Act (DCEA), was introduced by Congressman GT Thompson (R-Pa.), the Ranking Member of the House Agriculture Committee, along with Reps. Ro Khanna, Tom Emmer, and Darren Soto.
- S. 4760, the Digital Commodities Consumer Protection Act of 2022 (DCCPA) was introduced by Senators Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.), the Chair and Ranking Member of the Senate Agriculture Committee in August 2022, with a companion bill (H.R. 8950) introduced by Congressman Sean Patrick Maloney (D-N.Y.) in September 2022.
One of the key differences between these bills is that under the DCEA, it would be voluntary for trading facilities to register as a “digital commodity exchange” with the CFTC, whereas under the DCCPA, it would be mandatory for any entity acting as a digital commodity platform to register with the CFTC in the applicable categories (i.e., digital commodity broker, digital commodity custodian, digital commodity dealer, and digital commodity trading facility). The DCEA also draws a line between tokens that are securities subject to SEC jurisdiction and commodities subject to CFTC jurisdiction and provides an exclusion for certain types of securities, while the DCCPA leaves it up to the SEC to define which tokens are securities under their jurisdiction.
Defining which cryptocurrencies are securities and which are commodities is important because it will determine future registration and oversight requirements for crypto exchanges. CFTC Chair Rostin Behnam has called at least Bitcoin and Ethereum commodities, and said that “the CFTC’s expertise and experience make it the right regulator for the digital asset commodity market.” On the other hand, Securities and Exchange Commission (SEC) Chair Gary Gensler has said that he believes most cryptocurrencies are securities, with the exception of (perhaps only) Bitcoin. Until there is regulatory clarity on this front, exchanges will continue to do their best to determine which tokens are considered securities based on enforcement actions and their own legal assessments applying the Howey test. However, the lack of clear guidance is likely to prevent cryptocurrency businesses from undertaking some of the business lines they are considering in the meantime for fear of facing potential regulatory consequences.
Before Congress went out for recess, Senate Agriculture Committee staff worked with the crypto industry and the Administration to come to an agreement on final definitions and determine which entities would be covered under the DCCPA. These bills have more momentum now than ever — we could see an eventual path toward legislative passage as the need for the CFTC to have additional oversight authorities has become increasingly urgent.
Stablecoins have been on the congressional radar for some time, spurred in part by reports like the November 2021 Report on Stablecoins from the President’s Working Group on Financial Markets, and in part by recent events in the crypto ecosystem, including the collapse of the algorithmic stablecoin TerraUSD. In February 2022, Congressman Josh Gottheimer (D-N.J.) released a draft bill, the Stablecoin Innovation and Protection Act of 2022, which would:
- Require all qualified stablecoins be issued by either a bank or a non-bank qualified stablecoin issuer;
- Define qualified stablecoins as a cryptocurrency redeemable on demand on a one-to-one basis for U.S. dollars and issued by one of the two types of qualified issuers; and
- Provide the OCC with primary oversight authority over both types of stablecoin issuers and also require the FDIC to develop a Qualified Stablecoin Insurance Fund to manage the insurance of redemption payments of non-bank issuers.
In March 2022, Senator Bill Hagerty (R-Tenn.) introduced S. 3970, the Stablecoin Transparency Act and Congressman Trey Hollingsworth (R-Ind.) introduced a companion bill (H.R. 7328) in the House. The bill, which would only apply to fiat-backed stablecoins, would require that stablecoin issuers publish monthly disclosures about their reserves and hold their reserves associated with fiat currency-backed stablecoins in:
- Government securities that have maturities of no longer than 12 months;
- Fully collateralized security repurchase agreements; or
- United States dollars or any other non-digital currency
The stablecoin bill with perhaps the most potential momentum has been co-authored by House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) and Ranking Member Patrick McHenry (R-N.C.). They have been working on (still-untitled) stablecoin legislation since July 2022 that would (as of the most recent draft) give the Federal Reserve oversight over stablecoin issuers, implement new reserve requirements to ensure that customers would be made whole in the event of insolvency, and implement a two-year ban on algorithmic stablecoins while Treasury conducts studies on them. While they hoped to finalize the draft and mark it up in September, they were not able to come to agreement with relevant stakeholders on all provisions, and the bill is still being negotiated. Given the important positions of the lead sponsors on the House Financial Services Committee, this bill is one to watch closely. It may not be ready after the midterm elections, but Congressman McHenry has made it clear that this bill is a priority for him and if the House of Representatives is controlled by Republicans next year, he will be able to advocate strongly for its passage.
Tax exemptions for small personal transactions
In February 2022, Congresswoman Suzane DelBene (D-Wash.) introduced H.R. 6582, the Virtual Currency Tax Fairness Act of 2022, together with Congressmen Soto, Emmer, and Schweikert. One of the frequent critiques of cryptocurrency is that it is not often used for everyday transactions. The reason for this is that every time you spend or exchange cryptocurrency, it is a taxable event. This bill aims to simplify the use of digital assets for everyday purchases by creating an exemption from taxation for personal transactions that are $200 or less that use cryptocurrencies for goods and services.
Several months later, in July 2022, Senators Patrick Toomey (R-Pa.) and Kyrsten Sinema (D-Ariz.) introduced the S. 4608, the Virtual Currency Tax Fairness Act. This bill provides a similar exemption, but would create a de minimis exemption for capital gains of less than $50 on personal transactions and for personal transactions under $50.
These sorts of exemptions would likely lead to a much broader adoption of cryptocurrency for everyday transactions. While this issue has not gained a lot of attention recently, it is sure to come up again as the Internal Revenue Service (IRS) provides the requirements for the broker reporting requirements mandated in the Infrastructure Act and as people start to prepare their taxes in the new year and are reminded of the frustrating and unequal tax treatment of cryptocurrencies.
National security issues
Finally, while the National Defense Authorization Act (NDAA) is not strictly a crypto bill, it is one of the few “must pass” pieces of legislation that Congress must tackle before the end of the 117th Congress. This means it often ends up being a vehicle for non-controversial pieces of legislation that can be “tacked on” and passed along with it. We saw this happen in the 116th Congress, when the Anti-Money Laundering Act of 2020, one of the most significant legislative reforms to the U.S. anti-money laundering (AML) regime in recent years, was included in the NDAA.
The House passed their version of the NDAA in July, which included several cryptocurrency-related provisions, including:
- A provision from Congressmen Meeks and McCaul requiring congressional notification for Department of State rewards paid using cryptocurrencies; and
- A measure put forward by Congressman Himes to modernize FinCEN’s special measure authorities to enable the Department of Treasury to enact special measures against international individuals or entities engaged in money laundering, expanding their existing scope beyond just those instances with a nexus with the US banking system to capture those avoiding the banking system, including through the use of cryptocurrencies.
In the Senate, Senators Reed and Inhofe, the Chair and Ranking Member of the Senate Armed Services Committee, opened floor debate of the NDAA in the Senate on October 11, paving the way for Senate deliberation on the bill. The Senators offered a substitute amendment to the House-passed NDAA, on the Senate floor. The substitute amendment strikes and replaces the text of the House-passed bill with the text of the S. 4543, the Senate Armed Services Committee-passed version of the NDAA.
A number of amendments that touch on cryptocurrency, blockchain technology, and related issues have been filed in the Senate, including:
- S.A. 5764 from Senators Chris Coons (D-Del.) and Rob Portman (R-Ohio), the Eliminate, Neutralize, and Disrupt Wildlife Trafficking Reauthorization and Improvements Act of 2022 (same language is also included in another amendment, S.A. 5951, the Natural Resources title), which includes a provision to consider programs and initiatives to address illegal wildlife trade on digital platforms.
- S.A. 5787 from Senator Mark Warner (D-Va.), a companion provision to the one Congressman Himes included in the House bill – Special Measures to Fight Modern Threats.
- S.A. 5814 from Senators Sinema and Lummis, the Improving Digital Identity Act of 2022, a provision to create the interagency Improving Digital Identity Task Force to coordinate a government-wide effort to develop secure methods for Federal, State, local, Tribal, and territorial agencies to improve access and enhance security between physical and digital identity credentials, particularly by promoting the development of digital versions of existing physical identity credentials, like driver’s licenses, e-Passports, social security credentials, and birth certificates.
- S.A. 5950 from Senators Warner and Rubio, which includes an assessment of the effect of the sanctions placed on Russia in the wake of the invasion of Ukraine, including any efforts by Russia to evade sanctions using digital assets.
- S.A. 6027, from Senator Cardin, the Small Business Broadband and Emerging Information Technology Enhancement Act of 2022, which would create a Broadband and Emerging Information Technology Coordinator who would cover distributed ledger technology and blockchain issues.
- S.A. 6035 from Senators Wicker and Lummis, a National Strategy for the Research and Development of Distributed Ledger Technologies.
- S.A. 6213 from Senators Warren, King, Durbin, and Duckworth, the Digital Asset Sanctions Compliance Enhancement Act of 2022.
- S.A. 6377 from Senators Whitehouse and Wicker, the ENABLERS Act of 2022, which would expand due diligence requirements to professions sometimes viewed as “enabling” money laundering, including investment advisors, attorneys, and accountants, including those providing the provision of services to a third party regarding the exchange of digital assets.
- S.A. 6078 from Senators Risch and Menendez, the Accountability for Cryptocurrency in El Salvador (ACES) Act, which would mandate reports on Adoption of Cryptocurrency as Legal Tender in El Salvador.
- S.A. 6282 from Senator Blackburn, the Say No to the Silk Road Act, which would require the State Department to issue a warning on the Digital Yuan, the central bank digital currency developed by the People’s Republic of China and require reports, recommendations, and guidance for agencies on its use.
When Congress comes back into session on November 14, consideration of the Senate version of the NDAA is on the calendar; however, there are many obstacles in its way. There may be additional amendments filed on this bill, some of which may touch on crypto or blockchain issues. But given the short time frame that Congress has to work through any changes to the Senate version of the legislation, any amendments adopted and included will have to be bipartisan and non-controversial.
Once the Senate version has been completed, the NDAA conference agreement will be up next and once passed by both Houses, the last thing that Congress has to tackle is the government spending bill. On September 30, with eleven hours to spare, President Biden signed a continuing resolution to fund the government through December 16. This will expire approximately four weeks after Congress comes back into session, and so passing a comprehensive funding package for FY2023 is a top priority. The House passed a series of appropriations bills as part of a six-bill minibus in July. The remaining bills in the House and the Senate will need to be negotiated and ultimately passed to keep the government operating. If Congress fails to do so by December 16. The Congress will have to enact another continuing resolution to keep the government operating to avoid a shutdown.
Bottom line: Congress has a lot on their plate and not much time left to get these provisions done. There could be a strong push to include crypto provisions in must-pass legislation before they adjourn for the year. If that doesn’t happen, we will continue to see movement in the 118th Congress. Many of these bills are bipartisan priorities, which will aid in their momentum. There is a good chance that we will soon see some of key issues addressed – CFTC authorities and stablecoins in particular.