• Michael Bacina

Laying the first blocks of US crypto regulatory reform


Two key US Senators sitting on important Congressional Committees have co-sponsored a balanced bipartisan bill to introduce regulation for crypto in the US, providing valuable leadership to global crypto regulation efforts. The Responsible Financial Innovation Act (RFI Act) is expected to take some time to become law, but has a number of exciting features covering key areas which have remained unclear for too long, and some important developments which may influence crypto regulation in Australia.


Definitions

It's key to have a standard set of common definitions when any new technology is being regulated. The RFI Act sets out a range of definitions which don't match up to the European approach. For example, it defines a 'digital asset' as:

[A] natively electronic asset that (i) confers economic, proprietary or access rights or powers; and (ii) is recorded using cryptographically secured distributed ledger technology, or any similar analogue; and [B] includes (i) virtual currency and ancillary assets, consistent with ... the Commodity Exchange Act; (ii) payment stablecoins ...; and (iii) other securities and commodities, that meet the digital asset definition.

The definition in the RFI Act of 'stablecoin' is based on collateral backed stablecoins, so algorithmic stablecoins (such as the recently collapsed Terra) will fall outside the framework set out for stablecoins, but would be picked up as 'virtual currency'. Under this proposed regulation, 'payment stablecoins' must have 100% dollar or financial asset backing, but a virtual currency could be an algorithmic stablecoin and not have a dollar or asset backing.


Other key terms defined in the RFI Act include: 'smart contract' (being computer code within a distributed ledger that executes instructions based on specified conditions), and 'distributed ledger technology' (a network of nodes which can cover open or closed systems and which must include some kind of consensus mechanism) and 'digital asset intermediary' (being a licensed provider of digital asset market services but which excludes depository institutions - banks).


Taxation of Digital Assets


The RFI Act proposes that all:-

  • digital asset transactions beneath USD$200 be considered tax-free;

  • lending against crypto assets become a non-taxable event, which would remove a significant and growing burden created by current reporting requirements being imposed on US citizens and encourage the use of crypto payment systems; and

  • DAOs be recognised as business entities for US tax purposes. Like all matters relating to these leaderless collectives, mapping out how a legacy legal system will fit DAOs under any traditional rules will likely be a lengthy and complex process given the range of ways DAOs can be structured.

Securities / Financial Products


Likely the most important part of the RFI Act is that it seeks for digital assets to be treated as commodities or digital property rather than as securities. Instead of the Securities and Exchange Commission, which has long argued that digital assets are securities and under its powers, the bill seeks to make the US Commodities Futures Trading Commission (CFTC) the principal regulator of digital assets through its introduction of a rebuttable presumption that digital assets sold are a commodity, not a security.


If enacted, this would settle longstanding grey areas and concerns around token sales and unlock significant commodities innovation across Consumer Protection, Payments Innovation, Banking Innovation and Interagency Coordination.


The progress of this rare bipartisan bill is going to be followed closely around the world.