An omnibus bill aimed at comprehensive reform of US cryptocurrency regulation was introduced yesterday by Representative Paul Gosar (R-AZ). It is thought to have little chance of passage at present, but, according to lawyers and backers in the industry, it does provide insight into what a top-to-bottom new law governing crypto could look like one day.
Marshall Hayner of Metal Pay and Erik Finman, who made a million from bitcoin before the age of 18 and now runs an investment fund, contributed to the discussion draft.
Presented on Mar. 9, the “Cryptocurrency Act of 2020,” sets out to define categories of digital assets and clarify which federal agency will oversee each tranche.
“The bill looks to provide not only clarity, but legitimacy to crypto assets in the United States,” said Will Stechschulte, Gosar’s legislative assistant, in a press phone call.
Regulatory uncertainty hangs like a cloud on the industry as it aims to attract conventional investors. Fully 56 percent of financial advisors cite “regulatory concerns” as reason not to invest in the nascent industry, a recent Bitwise survey found.
“Regulatory uncertainty has certainly been a shackle around the ankle of US investors,” Mati Greenspan, founder of Quantum Economics, and a former eToro analyst, said. “Many projects are simply choosing to move elsewhere.”
While there are existing proposals aimed at providing clear guidance – such as the Token Taxonomy Act and Commissioner on the Securities and Exchange Commission Hester Peirce’s “Safe Harbor” proposal – Gosar’s bill is the latest to take a holistic approach to crypto regulation.
The bill divides digital assets into three categories: crypto-commodity, crypto-currency and crypto-security with the Commodity Futures Trading Commission (CFTC), the Secretary of the Treasury via the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC) overseeing each, respectively.
“While the bill makes sense on the surface,” a deeper look reveals that its neat categorizations are potentially fatal flaws, said Lawson Baker, head of operations and general counsel at TokenSoft. A Bloomberg legal analyst said much the same, claiming an early draft of the bill “displays a lack of basic understanding of the relevant federal laws and regulatory agencies.”
Debate over the bill’s efficacy and overreach started in mid-December, when a draft version leaked. Jerry Brito, executive director of Coin Center, directed criticism at the bill’s sponsor, Rep. Gosar, who does not sit on the committees that might discuss his bill.
“It’s difficult for a member to move a bill in a committee of which he’s not a member, doubly so if he’s in the minority,” Brito wrote in a blog post. He now says the bill should be opposed on principle, if it shows any signs of life.
“It’s dead on arrival,” Kristin Smith of the Blockchain Association, said after reviewing the latest version.
Following its introduction to the floor late Monday afternoon, Ben Goldey, Gosar’s representative, said the bill will now pass to a committee for review. “Usually within the first week it will get assigned, but I suspect Financial Services [Committee,]” will take it up, Goldey said. Finman suggested it may be reviewed first by the House Committee on Agriculture.
Whether the bill passes or not, it’s sweeping ambition is already redefining the scope of crypto regulation. Attempting to simplify the issues around cryptocurrency and its relationship to the larger economy, the bill is an example of why it’s so hard to define what crypto is and how it should be treated.
CoinDesk spoke with lawyers, investors, and the bill’s writers about how the bill takes on crypto’s big regulatory issues and likely goes too far.
Gosar’s bill defines crypto-commodities as an “economic good or service, including derivatives that have full or substantial fungibility; the markets treat with no regard as to who produced [them;] and rest on a blockchain or decentralized cryptographical ledger.”
This broadly defined concept would include bitcoin, ethereum, and any digital asset with free floating valuations. The bill would also place these commodities under the purview of the CFTC. However, as Robert Kim, a Bloomberg legal analyst noted: the CFTC does not regulate commodities themselves, but derivatives traded off them.
“The CFTC indicated early on that virtual currencies, such as bitcoin are commodities under the Commodity Exchange Act. However, that does not mean they regulate the day-to-day activity of spot exchanges,” said Donna Redel, board member of New York Angels and a professor at Fordham Law and Fordham Gabelli School, said. “Do they have the capacity to review that? The regulators themselves would have to see what’s feasible here.”
Similarly, the Financial Crimes Enforcement Network (FinCEN) was selected to oversee “crypto-currencies,” despite not actually regulating currency. Marshall Hayner, CEO of Metal Pay, thinks that’s a pedantic statement.
“When you launch a crypto product and deal with stablecoins, you’re dealing with FinCEN,” he said in a phone call. “Anti-money laundering requirements are top of mind for any firm that wants to remain compliant.”
Lawson Baker, head of operations and general counsel at TokenSoft, a technology company automating finance by porting financial assets onto blockchains, noted that the definition given to “crypto-securities” by the bill does not capture real world use cases of blockchain technology.
The proposed definition: “all debt and equity that rest on a blockchain or decentralized cryptographic ledger,” makes sense in some contexts, Baker said, but in reference to traditional assets misses the mark.
For example, mortgage debt that could be issued on a blockchain. “Under [the bill’s] rules, a tokenized mortgage would be a ‘crypto-security’ requiring registration with the SEC absent an offering exemption,” Baker said. “As we all know, mortgages are already regulated by state and federal banking laws and not the SEC.”
Likewise, Redel pointed out that even broad definitions may not allow projects room to breathe. She pointed instead to Hester Peirce’s proposal for a safe harbor for token projects, which grants three years exemption for projects to decentralize.
“The digital asset industry is constantly evolving,” Redel said. “Any effort of legislation has to take into account future innovation in the space and what else happens in the coming years. It’s not good to bet on a horse race if you don’t know the players.”
Under the Act, a “decentralized cryptographic ledger” refers to a “ledger that (A) runs as a stand-alone blockchain that is secured through a minting mechanism…” As Baker notes, “this definition presumes all cryptocurrencies will operate on blockchains and public ledgers, completely ignoring how privacy coins like Zcash will operate in the future.”
Mati Greenspan takes a realistic view. While clearer frameworks may bring in entrepreneurs, investors and traditional financiers standing on the sideline of crypto, decisions to invest are also impacted by the larger mechanizations of the economy.
“Sentiment is way down due to the effects of the [Corona] virus and most people aren’t exactly in an investing mood lately,” Greenspan said.
Likewise, Nic Carter, a venture capitalist with Castle Island Ventures said crypto is “an asset class that’s really just an outlet for gambling.” Adding, these “excesses of crypto [are] definitely a function of our stage in the economic cycle.”
Carter adds that clear guidance for tax liabilities are also necessary, which the bill fails to address.
What good is an omnibus bill if it cannot pass? What about more focused approaches for that matter?
The Token Taxonomy Act was successfully introduced, but was ultimately stalled during the review period. While Erik Finman is confident that his bill will pass, “I’m not even considering failure as an option,” he said, a similar situation is likely to transpire here.
“The optimum way to regulate the industry would be for the agencies to come up with a robust set of rules,” Donna Redel said. “This is preferable than the slower process of adjudicating and then waiting for the agencies to catch up. But the courts will, hopefully, always be there to provide guidance.”
While this process is slow, and companies may lose time and competition, Redel is skeptical that any prescriptive law could cover all the facets of the industry.
Josh Lawler, a partner at Zuber Lawler, agreed. “Looking at various statutory schemes, most don’t work. The Swiss system doesn’t work, really. Some are better than others, but it’s not that easy to get a comprehensive plan.”
“My gut says we should stay nimble right now and define later. Read: push regulators to provide rule updates or additional guidance under current definitions rather than unintentionally redefine the scope of an agency’s regulatory jurisdiction,” Lawson Baker said.
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