New US Draft Law classifies digital assets as commodities

A widely anticipated crypto regulation was unveiled on Tuesday. The draft law provides some long awaited clarity for crypto markets and provided definitions for most digital assets as commodities, giving most of the oversight to the Commodity Futures Trading Commission.

Known as the Responsible Financial Innovation Act, the draft law was introduced by Republican Senator Cynthia Lummis and Democratic Senator Kirsten Gillibrand. After months of work with the House and Senate, this regulation is the first extensive bipartisan attempt to provide legal clarity to crypto markets. And it comes at a time when calls for more regulation intensified after the collapse of the stablecoin TerraUSD.

It is not likely the draft law will be passed quickly because of the looming midterm elections in November.
The biggest takeaway from the draft law is that most cryptocurrencies, including Bitcoin and Ethereum, are defined as commodities, which fall under the purview of the CFTC and not the SEC (the US Securities and Exchange Commission).

More specifically, the legislation defines even smaller cryptocurrencies like Cardano and Solana as “ancillary assets” and treats them as commodities.

The definition of “ancillary assets” will always be presumed to be the case unless cryptocurrencies act as securities. In that scenario, the primary regulator will be the SEC. Those would be crypto securities that do not meet the Howey Test. Some of those exclusions are listed as interest payment, a dividend payment, profit, or revenue share from “entrepreneurial or managerial efforts of others.”

The new draft law also sets out rules for “stablecoins” — digital assets pegged to traditional fiat currencies like the US dollar. One of the conditions is that stablecoin issuers would be asked to keep high-quality liquid assets equal to the amount of all outstanding stablecoins. They would also be required to disclose the assets backing their tokens publicly.

The two senators’ offices described this as a “landmark bipartisan legislation that will create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.”

The two Senators will be speaking at Consensus 2022 this week at a panel titled Washington’s Crypto Awakening: The Lawmaker Town Hall.

The industry’s reaction to the draft law has been positive, with many touting the draft law as a big step forward for the crypto space, preferring the CFTC oversight over the SEC.

It provides much-needed clarity to US regulatory bodies and industry participants on various aspects, reducing the overhang of uncertainty on the sector, which has been a headwind to its long-term maturity. While it is positive that primary authority will rest with the CFTC (as opposed to the SEC), the most efficient way to regulate would be to establish a new, specific, crypto, self-regulatory organization, as other jurisdictions have done recently.

Those involved in the crypto space would like to see more clarity on what the potential collaboration between the CFTC, the SEC, and the FDIC would look like. This bipartisan draft law should have the support of the majority of the cryptocurrency and investment industry. Although a new regulator devoted exclusively to digital assets is the preferred regulatory model, the digital asset industry would be regulated by a combination of federal agencies, namely the SEC, CFTC, and FDIC.

The proposed draft law’s definition of ancillary assets is certainly a step in the right direction, and we welcome further evolution of US regulators’ views on this burgeoning asset class.

The crypto mining industry is also starting to feel some regulatory heat, especially in the state of New York. On Friday, New York State Senate passed a draft law that would put a two-year moratorium on new permits and renewal of existing permits for cryptocurrency mining facilities that use carbon-based fuel.

The draft law would only impact mining operations that use energy-intensive proof-of-work methods that get their power from plants that burn fossil fuels. Many crypto proponents have criticized the legislation, including Ethereum founder Vitalik Buterin. “The government picking and choosing which specific applications are an okay use of electricity or not is a bad idea. Better to just implement carbon pricing, and use some of the revenues to compensate low-income users,” Buterin tweeted.