Under a bipartisan bill introduced on Tuesday by Sens. Cynthia Lummis (R-Wyoming) and Kirsten Gillibrand (D-NY), the Securities and Exchange Commission would lose its jurisdiction to regulate a huge swath of the crypto market, including the 200 most valued cryptocurrencies (D-NY).
The Responsible Financial Innovation Act is the most complete piece of crypto legislation introduced to date, and it includes a number of other key provisions, such as removing the requirement to report crypto earnings of less than $200 to the IRS.
In the current Congress, the bill has a slim probability of passing. However, following the November mid-term elections, it is projected to gather new momentum in 2023, and to shape the outlines of future crypto legislation.
Goodbye, SEC, and hello, CFTC.
One of the most significant provisions in the bill is the proposed language ending the SEC’s jurisdiction over much of the crypto industry. This comes after years of complaints about a lack of clarity as to whether a digital token like Ethereum is a security—a designation that would require the token to be registered with the SEC.
Instead of the SEC, the measure proposes giving the Commodity Futures Trading Commission, which regulates commodity trading, power over numerous tokens. The bill “give the CFTC exclusive spot market jurisdiction over all fungible digital assets that are not securities, including auxiliary assets,” according to a summary circulated by Senators Lummis and Gillibrand.
The addition of the term “ancillary assets” to the Securities Exchange Act of 1934 is crucial. Auxiliary assets, according to the bill description, are those that are not entirely decentralized (like Bitcoin) but do not provide rights to profits or other financial interests in a business entity.
People involved with the bill’s drafting told Reuters that this definition would apply to well-known blockchain projects like Cardano and Solana, as well as the top 200 assets on CoinMarketCap, a website that indexes cryptocurrencies by market capitalization. Projects would have to file quarterly reports about things like how many tokens were issued to be qualified for the “ancillary asset” classification, which is meant to promote transparency.
The bill’s summary also states that it is designed to codify the “Howey test,” a Supreme Court theory from the 1940s that determines when an asset is a security. The Howey test, according to sources involved with the bill’s drafting who asked not to be identified by name, clearly shows that cryptocurrencies are not securities, and that the SEC’s interpretation that they are is erroneous.
Their comments were an implied rebuke to the SEC’s current chairman, Gary Gensler, who is widely despised in the crypto community and is accused by former SEC employees of manipulating the agency to further his political goals.
It’s uncertain whether the Howey test’s terminology is legally sound, or whether most cryptocurrencies are securities under the test, as many crypto attorneys have indicated.
In any case, the measure includes a clause that allows the SEC to sue in federal court to challenge a cryptocurrency’s categorization as a security.
Finally, if the law succeeds and the CFTC takes over primary responsibility over the crypto sector, the agency will receive a significant cash infusion—funded mostly by the crypto business itself—to help it carry out its substantial new obligations.
