The “Lummis-Gillibrand Responsible Financial Innovation Act,” announced this morning, lays out a bold agenda for legal reform across multiple regulatory regimes aimed at clarifying legal requirements for regulated entities to issue, trade, and provide services related to certain digital assets. Although a point by point summary of the 69 page bill is beyond the scope of this post, here’s a brief summary of 10 impactful provisions from the Bill:
- Applies generally to incorporated entities and entities that hold licenses issued by various governmental bodies; unincorporated DAOs, users of digital assets, and DeFi protocols generally would not be affected by this Bill (but certain definitions leave in wiggle room to include unlicensed or unregistered persons or entities who may be “required by law to hold such a license, registration or similar authorization….).
- Excludes a gain or loss in the amount of $200 or less in transactions for “goods or services” (not fiat, other virtual currencies, other digital assets, securities, or commodities) from gross income for federal income tax purposes.
- Requires regulated entities to make disclosures to consumers related to a number of topics including: crypto lending, custodial providers’ treatment of forks/airdrops, rehypothecation of assets, choice of crypto asset network to support.
- Introduces “ancillary asset” concept to split the digital asset that is delivered with the purchase of an offering that is considered to be an investment contract from the promises made in an investment contract (provided that the digital asset itself is not debt/equity, and the digital asset does not provide a profit share, or other financial interests in a business entity) and thereafter requires the issuer of the investment contract to make a robust set of targeted disclosures until a certain level of decentralization. Intermediaries facilitating the trading of ancillary assets are subject to CFTC jurisdiction. (For more on the genesis of the ancillary asset, see Cohen, Lewis, Ain’t Misbehavin’: An Examination of Broadway Tickets and Blockchain Tokens (2019). Wayne Law Review, Vol. 65, No. 1, 2019, Available at SSRN: https://ssrn.com/abstract=3501764)
- Authorizes spot crypto asset exchanges to register with the CFTC.
- Corrects the provision of the 2021 Infrastructure Investment and Jobs Act (HR 3684) expanding the tax law definition of Broker to include any “person who… is responsible for providing any service effectuating transfer of digital assets on behalf of another person.”
- Clarifies that staking/mining/proceeds are not part of a taxpayers gross income until the taxpayer “exercises dominion” over those assets, (amending the oft criticized language found in the IRS Rev Rule 2019-24 which used the passive “has dominion and control” test)
- Permits depository institutions to issue payment stablecoins and creates requirements for issuers of a payment stablecoin including: maintaining high-quality liquid assets valued at 100% of the face value of all outstanding payment stablecoins, disclosing the assets backing the stablecoin and their value; and having the ability to redeem all outstanding stablecoins at par in legal tender.
- Prohibits banks from using reputation risk in the examination rating of a depository institution and requires federal banking agencies to provide appropriate reasons for requesting or ordering a regulated entity to terminate a customer account.
- Directs state banking supervisors to adopt uniform state money transmitter license requirements for transactions including digital assets in the next 2 years.
These new laws and amendments to existing law (and many others not covered herein) would radically change the way that regulated entities interact with digital assets in the United States. It is generally understood that the Bill is not likely to be passed this year, and may not be passed in its current form. However, the Bill is the product of significant bipartisan effort, and will likely lead to some form of material legislation affecting the regulation of digital assets in the coming years.
Interested in learning more? Stay tuned for more in-depth coverage of the securities law and commodities law implications of amendments suggested in the Lummis-Gillibrand Bill.