Review and prediction of US crypto regulation progress: Congress may make big moves in the coming months

After the White House released the Comprehensive Framework for the Responsible Development of Digital Assets, which provided some recommendations for legislative action by Congress, much of the crypto policy focus in Washington has now turned to several key bills in Congress. The top issues right now are:

• Regulatory clarity and additional oversight powers for the Commodity Futures Trading Commission (CFTC)

• Stablecoin Regulation

• Tax Clarity

• National security issues

The CFTC currently regulates the derivatives markets in the United States, including commodity futures, certain types of options, etc.

With less than a week until the US midterm elections, Congress is currently on recess. However, before lawmakers go on recess, there are some bills being actively debated and discussed.

Let’s take a deeper look at the various encryption bills that exist, what they do, and what we can expect from Congress in the coming months or into the incoming 118th Congress.

Lummis-Gillibrand Act

In June 2022, Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) jointly introduced S.4356 , the Responsible Financial Innovation Act (RFIA) . The bill outlines a comprehensive regulatory framework for digital assets that attempts to address a number of issues:

• It distinguishes between digital assets that are commodities or securities and will grant the CFTC exclusive jurisdiction over the spot markets for all (fungible) digital assets that are not securities (more on this later).

• It also clearly defines tax provisions and exempts digital assets used to pay for goods and services for amounts below $200 from taxation.

• It provides guidance on disclosures required of digital asset issuers and providers.

• It would subject stablecoin issuers to new regulation.

• It classifies decentralized autonomous organizations (DAOs) as business entities for tax purposes.

• It also calls for extensive research on the use of distributed ledger technology by depository institutions, decentralized finance (DeFi), energy consumption in digital asset markets, and self-regulation.

Sens. Lummis and Gillibrand have said that this legislation is intended to start a conversation about crypto regulation and policy in Washington. They see great promise in cryptocurrencies and Web3 technology, but are concerned about risk events in the cryptocurrency ecosystem (including the collapse of the algorithmic stablecoin TerraUSD, as well as scams and hacker attacks), so they need to strengthen supervision and consumer protection in the cryptocurrency field to ensure that Americans can safely participate in the cryptocurrency ecosystem.

Which brings us to some of the stricter bills Congress is considering…

Regulatory Clarity and CFTC Oversight

There are several bills in the House and Senate that would give the CFTC additional oversight powers over the crypto industry. Currently, the CFTC has enforcement authority over futures markets as well as fraud and market manipulation, but they would need congressional action to allow them to regulate spot markets.

There are several bills in the House and Senate Agriculture Committees that would give the CFTC authority over the cryptocurrency spot markets. Before we dive into the bills, you ask, why is the Agriculture Committee involved in crypto legislation? This has nothing to do with yield farming, it’s because the Agriculture Committee has oversight over the CFTC because the CFTC regulates some “traditional” commodity markets like corn, oats, soybeans, and wheat. Now, in addition to these traditional commodities, the Agriculture Committee has added cryptocurrency to the mix.

• H.R. 7614, or the Digital Commodity Exchange Act (DCEA) , was introduced in April 2022 by Congressman G.T. Thompson (R-Pa.), Ranking Member of the House Agriculture Committee, and Representatives Ro Khanna, Tom Emmer, and Darren.

• S. 4760, the Digital Goods Consumer Protection Act of 2022 (DCCPA) , was introduced by Senators Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.). A companion bill to the act (H.R. 8950) was introduced in September 2022 by Senate Agriculture Committee Chair and Ranking Member Co-Congressman Sean Patrick Maloney (D-N.Y.).

One of the main differences between these bills is that under the DCEA, cryptocurrency trading platforms can voluntarily register with the CFTC as a "digital commodity exchange" on a voluntary basis, while under the DCCPA, any cryptocurrency business entity must register with the CFTC as a "digital commodity platform" based on the categories (digital commodity broker, digital commodity custodian, digital commodity dealer, and digital commodity trading platform). The DCEA also draws a line between "security" cryptocurrencies that are subject to the SEC's jurisdiction and "commodity" cryptocurrencies that are subject to the CFTC's jurisdiction, while the DCCPA leaves it up to the SEC to define which tokens are "securities" under its jurisdiction.

Defining which cryptocurrencies are securities and which are commodities is important as it will determine future registration and oversight requirements for cryptocurrency trading platforms.

CFTC Chairman Rostin Behnam is inclined to define Bitcoin and Ethereum as commodities, saying, "Due to expertise and experience, the CFTC will be the appropriate regulator for the digital asset commodity markets."

On the other hand, Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), believes that most cryptocurrencies are securities, with the exception of Bitcoin.

Until there is clarity on the classification of cryptocurrencies, trading platforms should continue to make their best efforts to determine which tokens are considered securities based on enforcement actions and their own Howey test assessments. However, the lack of clear guidance may discourage cryptocurrency business entities from conducting some of the new businesses they are considering due to concerns about potential illegal consequences.

These bills have more momentum now than ever before — and we could see a path toward eventual passage of “ cryptocurrency legislation ” as the market and industry demand for additional oversight powers for the CFTC becomes more pressing.

Stablecoin Regulation

Stablecoins have been on Congress’ radar for some time, in part due to the release of the President’s Working Group on Financial Markets’ stablecoin report in November 2021 and in part due to recent events in the cryptocurrency 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 eligible stablecoins to be issued by qualified bank/non-bank issuers;

• A qualifying stablecoin is defined as a cryptocurrency that is redeemable for U.S. dollars on demand.

• It gives the OCC (Office of the Comptroller of the Currency) primary supervisory authority over the two stablecoin issuers and requires the FDIC (Federal Deposit Insurance Corporation) to launch a qualified stablecoin insurance fund to manage stablecoin redemption insurance for non-bank issuers.

In March 2022, Senator Bill Hagerty (R-Tenn.) introduced S. 3970, the Stablecoin Transparency Act . The bill applies only to stablecoins backed by fiat currencies, requiring stablecoin issuers to disclose their U.S. dollar reserves monthly and to hold only the following reserves:

• Government securities with a maturity of 12 months or less

• Fully Collateralized Securities Repurchase Agreement

• USD or any legal currency

The current stablecoin bill that may have the most potential is co-authored by House Financial Services Committee Chair Maxine Waters and Congressman Patrick McHenry (R-N.C.) . Since July 2022, they have been working on (as yet unnamed) stablecoin legislation that would give the Federal Reserve oversight over stablecoin issuers, impose new reserve requirements to ensure fulfillment for customers, and impose a two-year ban on algorithmic stablecoins. However, they have not been able to reach agreement with stakeholders on all terms, and the bill is still under negotiation.

This bill deserves close attention given the sponsor’s prominent position on the House Financial Services Committee. McHenry, one of the sponsors, has made it clear that this bill is a priority for him and he will be able to strongly advocate for its passage if the House is controlled by Republicans next year.

Tax exemption for small personal transactions

In February 2022, Congresswoman Suzane DelBene (D-Wash.) along with Congressmen Soto, Emmer, and Schweikert introduced HR 6582, the Virtual Currency Tax Fairness Act of 2022 .

One of the common criticisms of cryptocurrency is that it is not often used in everyday transactions. If it is, every time you spend or exchange cryptocurrency, it is a taxable event.

The bill aims to simplify the use of digital assets in everyday purchases by providing a tax exemption for purchases of goods and services under $200 using cryptocurrencies.

A few months later, in July 2022, Senators Patrick Toomey (R-Pa.) and Kyrsten Sinema (D-Ariz.) introduced S. 4608, the Virtual Currency Tax Fairness Act (different from the previous bill). The bill provides similar tax exemptions to the previous bill, again exempting capital gains and personal transactions under $50 from taxation.

These exemptions could lead to wider adoption of cryptocurrencies by users in everyday transactions.

National security issues

Finally, while the National Defense Authorization Act (NDAA) is not strictly a crypto bill, it is one of the few pieces of “must pass” legislation processed before the end of the 117th Congress. This means that it will eventually serve as a vehicle for non-controversial legislation that can be “attached” to and passed alongside 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 of Representatives passed their version of the NDAA in July, which included several cryptocurrency-related provisions, including:

• A provision from Congressmen Meeks and McCaul requiring Congress to notify the Department of State of awards paid in cryptocurrency ;

• Congressman Himes has introduced a measure to modernize FinCEN’s Special Measures Unit to enable the Treasury Department to take special measures against international entities or individuals engaged in money laundering, expanding its existing scope beyond those with ties to the U.S. banking system to catch those who circumvent the banking system by using cryptocurrencies.

When Congress reconvenes on November 14, the Senate version of the NDAA will be put on the agenda for consideration, however, there may be many obstacles. For example, the bill may have additional amendments, some of which may involve cryptocurrency or blockchain issues. But given that Congress must complete any changes to the Senate version of the NDAA in a very short time, any amendments passed and included must be bipartisan and non-controversial.

A number of amendments have been introduced in the Senate concerning cryptocurrencies, blockchain technology, and related issues, including:

• Senators Chris Coons (D-Del.) and Rob Portman (R-Ohio)’s SA 5764, the Eliminate, Neutralize, and Disrupt Wildlife Trafficking Reauthorization and Improvement Act of 2022 , includes a provision addressing illegal wildlife trade on digital platforms that is paid for with digital currencies.

• Senators Sinema and Lummis’ SA 5814, the Digital Identity Improvements Act of 2022 , seeks to create an interagency Digital Identity Improvements Task Force to coordinate across government to develop digital identity credentials for federal, state, local and territorial agencies, specifically to develop digital versions of existing physical identity credentials, such as driver’s licenses, e-passports, social security credentials and birth certificates.

• SA 5950 from Senators Warner and Rubio, which includes an assessment of the impact of sanctions imposed on Russia, including Russia’s use of digital assets to evade sanctions.

• Senator Cardin’s SA 6027, the Small Business Broadband and Emerging Information Technology Enhancement Act of 2022 , would create a Broadband and Emerging Information Technology Coordination Group to be responsible for blockchain-related issues.

• Senators Wicker and Lummis, SA 6035, Developing a national strategy for distributed ledger technology .

• SA 6213, the Digital Assets Sanctions Compliance Enhancement Act of 2022 , from Senators Warren, King, Durbin, and Duckworth.

• SA 6078, the Accountability for Cryptocurrency in El Salvador (ACES) Act , from Senators Risch and Menendez, would authorize a report on the adoption of cryptocurrency as legal tender in El Salvador.

• Senator Blackburn’s SA 6282, the “Say No to Silk Road” bill , requires the Department of State to warn about China’s development of a central bank digital currency, e-CNY, and to provide reports, recommendations and guidance that can be used by institutions.

Additionally, many of these crypto bills are bipartisan priorities, and Congress may push to bring them to fruition. If that doesn’t happen, we will continue to see pushes for more crypto bills in the 118th Congress. In the coming months, or in the incoming 118th Congress, we will likely see some key regulatory issues addressed quickly — specifically the CFTC’s regulatory authority and stablecoins .

Risk Warning:

According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the Central Bank and other departments, the content of this article is for information sharing only and does not promote or endorse any business or investment activities. Readers are requested to strictly abide by the laws and regulations of their region and not participate in any illegal financial activities.