The much-anticipated and much-anticipated crypto bill, the Responsible Financial Innovation Act adopted by US Senator Cynthia Loomis (R-WY), was recently introduced as a bipartisan proposal co-sponsored by US Senator Kirsten Gillibrand (D-NY). The ambitious and comprehensive bill has several key pillars — including regulatory oversight, clarity on tariffs, taxation, banking, and payment stablecoins — that, if passed, could reshape the world of banking and crypto beyond US borders.
The bill primarily focuses on centralized service providers and integrates them into existing organizational structures. The only suggestion regarding decentralized finance providers is consumer protection and appropriate disclosures. This is a good place to start as the number of users of exchanges and centralized systems far outnumbers the number of DeFi users at the moment.
We are entering dangerous territory where some crypto platforms eliminate risk with smart marketing, beautiful aesthetic design and user experience. Some even come close to misrepresenting digital assets as US dollar equivalent savings accounts. Today, users are exposed to opaque risks in a volatile environment triggered by BlockFi, Celsius, and other troubled CeFi operators.
The importance and value of regulatory oversight and consumer protection cannot be underestimated. In the unregulated landscape, consumers have limited information regarding cryptocurrency exchanges or the platforms where funds are sent and stored. Without rules and regulations, there is no basis for safe and sound operations, proper management and administration of a cryptocurrency trading platform or platform.
With the regulations in place, consumers will better understand that holding digital assets on a registered digital asset exchange is not the same as depositing digital assets on a crypto lending platform registered offshore. Second, consumers will better understand that each digital asset exchange or platform has differentiated capabilities in operational risk management and cybersecurity. Third, consumers will better understand how their money is stored and protected and what legal claims they have for that money under normal and exceptional circumstances, such as when an exchange or platform fails.
This article sheds light on the main elements of this law and highlights the potential benefits of regulation in the context of the dangers looming recently in the cryptocurrency industry. Regulation cannot eliminate risks, but it can mitigate many of them by creating an environment of trust for the majority of risk-averse users.
Clarify tariffs and taxes
A key element of the Lummis-Gillibrand bill is to define common definitions for the cryptocurrency industry and its ecosystem participants. It will be a watershed moment for the cryptocurrency industry when we see changes like “digital assets” and “payment stablecoins” in US code, literal law books.
We have seen in the past how poorly constructed tariffs can cause confusion and uncertainty. Senator Loomis previously led the fight against the broad definition of the term “intermediary” under the Infrastructure Investment and Employment Act that was signed into law in 2021. The law vaguely passes miners, digital asset miners, hardware and software wallet providers, and protocol developers as “intermediaries.” Subject to Internal Revenue Service (IRS) tax reporting requirements. The new crypto bill aims to change the definition of “intermediary”.
Recognition of cryptocurrencies as an asset class, when clearly combined with tax and accounting treatment, are the building blocks needed for broader adoption by institutions and businesses.
At the heart of the Lummis-Gillibrand bill, the regulatory scope is expanding to include digital assets and deliver much-needed consumer protection. Regulatory oversight is given to the current regulators, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The premise of determining who has regulatory power is based on a new, somewhat vague definition of “secondary origin”. In response to the bill, industry players are hoping that most cryptocurrencies by market capitalization will already fall into the additional asset class under the CFTC’s oversight.
The CFTC’s mandate extends to the regulatory oversight of digital asset exchanges, which will be required to register with the commission and will be subject to rules and standards relating to custody, segregation of funds from clients, market integrity, margin trading, regulatory reporting, and governance. , compliance. and risk management. It is frankly surprising that the industry, especially cryptocurrency exchanges, has grown so exponentially without the kind of rules and standards of traditional financial institutions that protect our money or our assets.
The consumer protection component of the bill primarily focuses on appropriate disclosures by people or protocols that provide services for digital assets. Disclosure of products, services, risks, fees, interest rate calculations, and re-mortgage policies is common to traditional financial services and should be required for the crypto industry as well.
Banks and payments
The Lummis-Gillibrand Bill lays the groundwork for depository institutions to issue “Payable Stable Coins,” which are formally defined as “redeemable, on demand, on an individual basis for US dollar-denominated instruments.” Stable payments must be fully booked and 100% backed by high quality liquid assets, as specified in the invoice or specified by banking regulators. Issuers are required to disclose their assets on a monthly basis and are subject to review and verification by the relevant banking regulatory authorities.
The stablecoin payment proposal is mostly in line with the recommendations of the President’s Stablecoin Task Force Report in 2021. One reason often cited against the PWG’s recommendation is that onerous regulatory compliance requirements will hinder progress and innovation. The bill responds to these criticisms by defining a supervisory approach dedicated to single depository institutions exclusively dedicated to issuing fixed coins for payment. Adaptation requires a simplified capital regulatory framework and a tailored plan to resume or stop operations under stress.
Qualified stablecoins issued by regulated depository institutions provide users with the option to operate in a trusted and whitelisted environment. It is important to note that the Lummis-Gillibrand bill does not prevent the issuance of stablecoins by non-custodial institutions, nor does it prevent sellers from creating fully unsecured stablecoins. However, the bill would allow users to better distinguish between safe and sound stablecoins (fully integrated into mainstream banking and compliant with regulatory requirements) from demo stablecoins.
As Senator Loomis Lazer and other lawmakers focus on lasers, we are seeing real traction for a comprehensive crypto-regulatory framework in the United States. Being a global leader means that the US Framework will serve as a model or guide for other countries and smaller markets around the world. It is imperative that US lawmakers and regulators take a clear and reasonable approach, and the Lummis-Gillibrand bill appears to do just that.
The next downturn in the cryptocurrency markets will be more impactful than the previous one. Millions of retail accounts are at risk of losing due to the inability to distinguish between the risks of one central service provider and another. Many investors have already suffered huge losses due to the inability to distinguish between the risks of a stable currency and another. For these users, regulation is critical and cannot come soon enough.