On Tuesday, two Senators introduced the first major bipartisan legislation aimed at reigning in the swashbuckling crypto market, an industry that accounted for 1 of every 4 dollars lost to fraud in 2021. The bill, which would treat digital assets as commodities and regulate them under the Commodities Futures Trading Commission (CFTC), not the SEC, arrives at an opportune moment: in the midst of a period of volatility in the crypto market, when many cryptocurrencies have plunged in value.
Senator Kirsten Gillibrand, a Democrat from New York, and Senator Cynthia Lummis, a first-term Republican from Wyoming, have worked for months collaborating with members of the House and Senate to introduce this bill, which is called the Responsible Financial Innovation Act.
For coin administrators and users, the content of the bill appears welcome. The CFTC is a far smaller and less powerful body than the SEC, with roughly one-sixth its budget. Perhaps more importantly, the CFTC has not publicly championed reining in cryptocurrencies as has the SEC.
What the Bill Proposes
The crypto bill introduced on June 7th is large and complicated with details that immediately delighted— or enraged— various individuals and groups.
The cornerstone of the bill is its decision to treat most digital currencies and coins as “ancillary assets,” or assets sold in tandem with the purchase and sale of a security — much as futures and other commodities are. The Washington Post notes that the CFTC already regulates futures contracts for Bitcoin and Ethereum, the two most popular cryptocurrencies out there. The new proposal, says the Post, “would give the agency wider power by handing it oversight of the crypto spot market as well — and envisions that market including a wide array of digital coins.”
Crypto advocates are pleased with Gillibrand and Lummis’s bill, but the bill would mean more regulation than in the past. Crypto companies would, for instance, need to begin making more thorough and consistent disclosures. These disclosures would include informing investors about issuers’ experience developing digital assets, as well as other details, such as descriptions of the management teams and liabilities of the various issuers.
As with most bills, the devil is in the details. Some bank industry groups object to a provision within the Responsible Financial Innovation Act that stipulates that depository institutions with state charters are entitled to an account at a Federal Reserve Bank, whether or not they are federally insured or supervised, according to American Banker. This provision is objectionable to traditional financial institutions because it would make it easier for non-banks to gain access to the payment, clearing, and settlement systems of the central banks.
 From January 1, 2021 through March 31, 2022, cryptocurrency was identified as the payment method for 24% of reported dollar losses in fraud reports to the FTC. Take a look here.
Battle: Far from Over?
Crypto regulation is a long time coming and Crypto industry participants heavily favor regulation by the CFTC over the SEC given the former traditionally employs less stringent oversight. Crypto advocates have been a strong proponent of the legislation with Politico describing lobbying as having “hit fever pitch”.
In recent months, SEC Chairman Gary Gensler has been extremely outspoken about the need for tighter regulatory control over the $2 trillion crypto market. In September 2021, Gensler went on the record in testimony before Congress, saying: “Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted. This asset class is rife with fraud, scams and abuse in certain applications.” And in an April speech, Gensler announced that the SEC plans to register and regulate crypto exchanges, among other steps to minimize investor risk.
Senators behind the new crypto bill both express a general friendliness towards digital assets, each viewing crypto as a boon to their jurisdictions economies. “State lawmakers in Wyoming have charted an aggressive course in creating new laws to accommodate crypto banks and decentralized trading platforms,” wrote Politico. Meanwhile, at a Politico Live event in early 2022, Gillibrand noted that “New York is the center of world financial markets” and crypto is an industry “that New York definitely wants to have a part of.”
Because of its size and complexity of the topics addressed, the newly unveiled crypto bill is unlikely to be passed wholesale, however some aspects may be reintroduced piecemeal. Whatever the fate of the current rendition of the bill, its release sets the stage for future debate and represents progress toward well defined regulation in the wild west of financial markets.