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Thoughts on the Responsible Financial Innovation Act

The Responsible Financial Innovation Act introduced by Senator Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) is a comprehensive, bipartisan bill attempting to create a complete regulatory framework for digital assets. Being a comprehensive bill, it covers definitions for digital assets, distributed ledger technology, smart contracts, stablecoins, and virtual currencies, among others. The bill also discusses taxation, securities, commodities, consumer protection, payments, banking, and interagency coordination outlined in President Biden’s March 9th Executive Order on Ensuring Responsible Development of Digital Assets.

I perceive this bill as inherently positive for the cryptocurrency industry and follows not only President Biden’s Executive Order, but also recent calls for regulatory clarity in the cryptocurrency industry and regulations on stablecoins. Thankfully, this bill also adopts the Keep Innovation in America Act introduced last year by House Representatives Patrick McHenry (NC-10) and Tim Ryan (OH-13) – a bill that attempted to fix the horrible tax provisions introduced in last year’s infrastructure bill; something that seemingly only exists as it was attached to a must-pass legislation at the 11th hour.

The bill provides the much-needed clarity on the cryptocurrency industry, tackling issues both large and small, resulting in legislation that promotes innovation to occur inside the United States allowing the US to become a global leader in the industry. Such sentiment was also shared by Congress during the Facebook Libra Congressional Hearing back in 2019. The much-needed clarity on a de minimis tax exemption, fair treatment of cryptocurrency banking, unification of monetary transmission laws across states, increased information sharing between agencies, and SEC custody requirements, are all positives for the industry.

Very notably, the bill hands the responsibility of governing this emerging industry to the Commodity Futures Trading Commission (CFTC) and considers most digital assets as commodities. As such, this bill includes an edited version of the Digital Commodity Exchange Act which was just reintroduced in April by House Representatives Glenn Thompson (R-PA), Ro Khanna (D-CA), Tom Emmer (R-MN), and Darren Soto (D-FL), which proposed making the CFTC the regulator for cryptocurrencies and defined them under commodities. However, the bill does clearly define that any asset that has components of debt, equity, profit revenue, and dividends are not commodities. The CFTC will certainly require additional resources to shoulder such a heavy responsibility.

In regard to Decentralized Autonomous Organizations (DAOs), it is important to clarify that the registration requirements are for tax benefits – so without registering, a DAO would be seen as an unincorporated association and would be open to tax and legal obligations so long as the DAO has any US exposure (i.e., any US-based members). DAOs are organizations that are supposed to be governed by their community. So while the creators of a DAO can be noted and can initially comply with these regulations, they turn over the control of the DAO to the community. I will note that there are DAOs that pretend to follow this ideology, and this regulation will make it harder for these to exist – which is a good thing.

Due to the increase in compliance, exchange oversight will also increase significantly as well as compliance costs, which could certainly result in increased fees for end-users. Users would also have to review and agree to terms from platforms based on their source code version, and any update to the source code would result in a new service agreement. A positive along with this, however, is that depository institutions, such as banks, will have the right to issue stablecoins and that stablecoins require 100% reserve – so no more algorithmic stablecoins that burn/mint based on market movements (such as the filed UST/Luna system that resulted in virtually a complete erasure of investment just last month!).

While there is no doubt much room for improvement, it is a breath of fresh air to see a comprehensive bipartisan bill tackle so many issues in the cryptocurrency industry and provide the regulatory clarity that I believe will bring many traditional investors and institutions into the industry that have been waiting on the sidelines for such legislation. I would also like to the bill eventually add some level of limiting the administrative burden on consumers and institutions, so this does not turn into another huge government bureaucracy; although, I am certain that lobbyists will certainly push specific rules and exceptions, which I hope the legislature is able to restrain. This is just the beginning for this bill, and it will have quite a journey on its way to hopefully becoming law, but it has my support and with the right adjustments and clarification can become the cryptocurrency regulation we have been waiting so long for!

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