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On July 12, Senator Kirsten Gillibrand, a Democratic senator
from New York who sits on the Senate Banking Committee, and Senator
Cynthia Lummis, a Republican senator from Wyoming who sits on the
Agriculture Committee, joined forces again to propose a comprehensive bill that seeks to organize and
operationalize the Federal Government's response to crypto
activities in the United States. In a press release announcing the legislation, the
two senators acknowledge working with many stakeholders (including
Cadwalader) to obtain "substantial feedback" to improve
their previous legislation (Summer 2022) and describe the 2023 bill
as greatly expanded legislation that "adds strong new consumer
protections and safeguards to further strengthen the industry
against fraud and bad actors, while giving American innovators the
chance to thrive." The Lummis-Gillibrand bill runs 274 pages
and addresses many crypto-related topics, including registration of
cryptocurrency exchanges, improved anti-money laundering
provisions, and updated directives regarding tax treatment of
various crypto activities, and establishes a path for depository
institutions to be able to issue payment stablecoins.
Most importantly, however, a key challenge of comprehensive
crypto legislation to date has been to identify when the Securities
and Exchange Commission ("SEC") and the Commodity Futures
Trading Commission ("CFTC") have jurisdiction over the
crypto activity โ mainly codifying the Howey test while
recognizing that not all crypto activities may or should be subject
to SEC and/or CFTC jurisdiction. The updated Lummis-Gillibrand bill
is significantly improved in this respect, providing a clear
definition for crypto assets that should be governed by each agency
(and, in some cases, by both agencies), and exempting tokenized
assets as well as payment stablecoins from that definition.
As in the previous version of the bill, the CFTC gets an
expanded grant of exclusive jurisdiction over "fungible crypto
asset" spot markets and the authority to register "crypto
asset exchanges" and regulate "decentralized crypto asset
exchanges." "Crypto assets" are included within the
definition of a "commodity"; however, some provisions in
the amended Commodity Exchange Act would only apply to
"commodities" that qualify as "crypto assets."
Futures commission merchants are included in the definition of
"crypto asset intermediary" and are authorized to
transact with "crypto assets" but must adhere to
mandatory segregation, third-party custody arrangements and
prevention of conflicts of interest with affiliates. A lot of
revisions in this version of the bill address the matters that have
caused the "crypto winter," and are addressed in
CFTC's and SEC's complaints and enforcement actions
involving FTX, Alameda, Binance and others.
The bill also involves a broader swath of agencies, including
the federal banking regulators, state bank regulators, the Office
of Foreign Asset Control ("OFAC"), the Financial Crimes
Enforcement Network ("FinCEN") and the Federal Trade
Commission ("FTC"), directing them variously to take
actions addressing consumer protection concerns, which include
everything from adopting a uniform money transmission law for the
regulation of crypto market participants at the state level to
educating consumers about the crypto market to creating advertising
standards for the marketing of crypto products and services.
Finally, for purposes of this brief note regarding the bill, the
SEC is provided with something that the section-by-section overview claims
"resolves a long-standing issue with SEC custody
requirements" such that when a crypto asset is being held in
custody, the SEC's requirement to maintain a satisfactory
control location "may be fulfilled by protecting the [crypto]
asset with commercially reasonable cybersecurity practices for a
private key."
Due to the comprehensive nature of the bill, this summary only
hits a few highlights of the bill, but we will provide more
in-depth analysis as the legislative process continues.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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