CrypTech Writings: Lawmakers unveil landmark crypto oversight bill with SEC, CFTC splitting regulatory duties, key focus on AML, sanctions, cyber defense

The Skinny:

  • In our latest installment of the series, key thought leaders in fincrime compliance regulatory oversight, crypto data analytics and enforcement analyze what lawmakers are calling a landmark bill create a complete regulatory framework for digital assets.
  • Central to the bill is regulatory enforcement, oversight and financial crime compliance. The bill directs the appropriate regulators to study the potential for sanctions avoidance, money laundering, and terrorist financing and to develop rules around appropriate cybersecurity standards along with how newer, more innovative technologies could improve regulatory compliance and risk management.
  • If passed, the Commodities Futures Trading Commission (CFTC) would have jurisdiction over the largest exchanges by market cap, based on definitions of assets as commodities, with the Securities Exchange Commission (SEC) having the smaller exchanges and therefore the most by number as classified as securities.

The ACFCS CrypTech Writings Series offers key updates on crypto, fintech, compliance and related regulation ruminations, tips, trends and more 

By Brian Monroe
bmonroe@acfcs.org 
June 8, 2022

In our latest installment of the CrypTech Writings series, key thought leaders in fincrime compliance regulatory oversight, crypto data analytics and enforcement analyze what lawmakers are calling a landmark bill create a complete regulatory framework for digital assets.

The Responsible Financial Innovation Act (RFIA), from U.S. Senators Kirsten Gillibrand (D-NY), a member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY), a member of the Senate Banking Committee, encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.

Central to the bill is regulatory enforcement, oversight and financial crime compliance.

The bill directs the appropriate regulators to study the “potential for sanctions avoidance, money laundering, and terrorist financing and to develop rules around appropriate cybersecurity standards” along with how newer, more innovative technologies could improve regulatory compliance and risk management.

If passed, the Commodities Futures Trading Commission (CFTC) would have jurisdiction over the largest exchanges by market cap, based on definitions of assets as commodities, with the Securities Exchange Commission (SEC) having the smaller exchanges and therefore the most by number as classified as securities.

The bill also sets out duties for examiners at the state and federal levels to scrutinize for “appropriate operational, compliance and information technology risk management,” a nod to recent high-profile hacks that have hit virtual value exchanges and any operation, entity and even individuals with hefty stores of digital assets.

To read the original press release by lawmakers about the bill, click here.

The full text of the bill is available here, in addition to a section-by-section overview.

Read the senators’ joint Medium post about their bill here.

Here are some insights, analyses and guidance from current and former regulators, compliance officers and government investigators, culled from social postings, interviews and public comments. 

Maria Vullo, Founder and CEO of Vullo Advisory Services and formerly New York’s Superintendent of Financial Services.

To read the original post and be part of the conversation, click here.

The newly-introduced Lummis/Gillibrand digital assets bill sets out a foundation for possible federal legislation.

In brief:

  • (1) The CFTC would have jurisdiction over the largest exchanges by market cap, based on definitions of assets as commodities, with the SEC having the smaller exchanges and therefore the most by number as classified as securities,
  • (2) the CFTC needs significantly more authority and resources to do this, and there is a question whether its current capabilities (or even the SEC’s) reach to the national security, AML and sanctions risks,
  • (3) the bill largely ignores the role of the federal and state banking regulators, except for placing stablecoin issuers within FDIC insurance (though not algorithmic ones),
  • (4) the discussions need to address money transmission versus exchange-traded digital assets as these are very different usages that should be regulated differently (that is, trading a security or a commodity is different than using a digital asset to send value oversees as per “democratization of finance”), and
  • (5) what if an exchange wants to trade coins that are both securities and commodities?

In terms of next steps and timing, this bill will have many interested stakeholders and key persons to hear from, including the SEC’s Gensler, Secretary Yellin, OCC’s Hsu, state regulators including the Conference of State Bank Supervisors (CSBS), the American Bankers Association, and consumer advocates.

From a Congressional standpoint, it needs to go through many committees of Congress, and there are many turf-holders and seekers who will weigh in. It’s a good start but can it be passed in six months in an election year?

David Carlisle, Vice President of Policy and Regulatory Affairs at Elliptic, a blockchain analytics firm

To read the original post and be part of the conversation, click here.

Today US Senators Cynthia Lummis and Kirsten Gillibrand released the Responsible Financial Innovation Act – a sweeping piece of draft legislation that sets the stage for comprehensive regulation of the crypto space, and that aims to settle outstanding debates around regulation of the industry.

There’s a huge amount to dissect here, so expect more analysis later. But for now, here are some of the highlights and initial impressions:

– The bill defines most #cryptoassets such #bitcoin and #ethereum as commodities.

This would bring spot markets for those assets under the jurisdiction of the U.S. Commodity Futures Trading Commission. The CFTC would become the major regulatory authority for crypto markets, and US exchanges would need to register with it.

– Regulatory oversight of crypto spot markets could help pave the way for a long-desired crypto exchange traded fund (ETF).

The reason: since it would subject crypto market participants to more robust oversight around market manipulation, where there’s currently been a lot of grey (a major impediment to getting a bitcoin ETF approved). But also comes with lots of additional compliance obligations!

– The bill potentially reduces the role of the U.S. Securities and Exchange Commission (SEC).

How? By defining cryptoassets as “ancillary assets” – which means that unless a cryptoasset functions in the same way similar to corporate stock, it would be unlikely to meet the definition of a security in most cases.

The SEC has taken a very broad interpretation to date of when the sale of cryptoasset or related product is a security, and this could reign that in.

– This clarity around regulatory oversight is something the industry will welcome.

But it would be a mistake to assume that consolidating oversight under the CFTC will result in a lax position.

The CFTC has been very willing to wield its enforcement powers to date – as seen by enforcement actions it took against BitMex and Polymarket, among other crypto industry participants.

– The bill also provides for a more robust consumer protection framework.

That is something very high on the legislative and policy agenda in light of the Terra/UST stablecoin crash.

It would oblige trading platforms to conduct robust due diligence on assets they list and to disclose more information about the status of those products to users.

In this way it contains some similar provisions to the European Union’s proposed Markets in Crypto-asset (MiCA) regulatory framework.

– An important pro-innovation aspect of the bill relates to tax.

The bill would exempt small crypto transactions (i.e. those under $200) from capital gains taxes, which currently is an impediment to the use of crypto in payments and for other purposes (such as frequently swapping between stablecoins and other measures).

Ari Redbord, Head of Legal and Government Affairs at TRM Labs, the blockchain intelligence company.

Prior to joining TRM, he was the Senior Advisor to the Deputy Secretary and the Undersecretary for Terrorism and Financial Intelligence at the United States Treasury.

To read his original posting and be part of the conversation, click here.

Best summary/insights I have seen so far on the Lummis/Gillibrand Responsible Financial Innovation Act (the “RFIA) comes from the inimitable Lewis Cohen and the DLx Law team. Subscribe and follow Lewis for rock solid legal insights.

From the DLx email summary – for those looking for a quick TLDR, here’s what you need to know:

What Makes This Bill Different?

The RFIA takes a big picture approach to regulation, tackling a myriad of regulatory questions across a number of regulators including the SEC, CFTC, and IRS.

Other crypto bills have focused on specific crypto issues in isolation (e.g., fixing that broker definition).

The RFIA incorporates many of this session’s proposals, as well as introduces several other necessary clarifications, into one comprehensive plan for regulation.

Today’s Vocabulary Word: “Ancillary Asset”

Title III draws a distinct line between the investment contract that occurs at the initial sale of a digital asset and the digital asset itself.

Because digital assets can (and are often designed) to exist after the dissolution of their issuer, a digital asset is “ancillary” to any investment contract made with the issuer.

Therefore, when an asset itself doesn’t give debt, equity, or voting rights (in any business) to its holder, it is an “ancillary asset” and will be treated as a commodity.

SEC and CFTC Jurisdiction

Under Title III most tangible digital assets (including ancillary assets) will be treated as commodities.

The CFTC will have spot jurisdiction over digital asset trading in addition to its jurisdiction over derivatives trading. The bill similarly expands the SEC’s oversight authority.

Ancillary asset issuers whose initial token sale constitutes an investment contract will be responsible for periodic disclosures until the issuer demonstrates that it is decentralized (i.e., no longer engaging in managerial or entrepreneurial efforts that directly affect the value of the asset).

Other Top Draft Picks

  • Sec 204: Tax guidance on DAOs (classifying DAOs as business entities that are not disregarded entities)
  • Sec 604: Authority to commence banking (allowing bank charters for issuing a payment stablecoin)
  • Sec 803: State money transmission coordination (requiring states to adopt substantially similar money transmission rules for digital assets)

Check out the entire excellent DLx Law analysis here: https://lnkd.in/g9DnQt7Y