New “Innovation Act” Bill Seeks to Clarify U.S.’ Digital Asset Regulations

Republican congressman Patrick McHenry and Democrat Stephen Lynch have presented a surprising new bipartisan legislative proposal to the U.S. Congress last week that seeks to definitively clarify the States’ regulatory policing of cryptocurrencies.

The bill aims to create a combined working group of experts and representatives from both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), with a clear goal to analyze and find improvement for the United States’ current digital asset legal and regulatory framework. 

The bill is co-sponsored by Republicans Glenn Thompson, Ted Budd and Warren Davidson (the latter who previously introduced the Token Taxonomy Act of 2019 which he also revived last week with a 2021 update), and titled “Eliminate Barriers to Innovation Act of 2021

The proposal will have the important purpose of clarifying once and for all whether the SEC or the CFTC (rumored to be currently investigating Binance for possible derivatives trading transgressions following its 2020 takedown of BitMEX) has jurisdiction over a specific token or digital asset. This is a tricky subject that the “Crypto-currency Act of 2020” also tried and failed to address last year.

In other words, the legislation will try to define whether an asset is a security, to be regulated by the SEC, or a commodity, subject to the jurisdiction of the CFTC. 

This particular question has been a contentious topic in the United States in recent months following the SEC’s prosecution of Ripple for allegedly operating an unlicensed security in its XRP cryptocurrency.

The question of whether an asset is a security or a commodity under U.S. law is not a new one, and involves the conjuring up of the antiquated “Howey Test”, first presented in the pivotal 1946 case of the SEC vs W.J Howey Co. where the Supreme Court established a few key criteria that an asset would have to meet in order for it to be considered a security. Ripple has argued that the Howey Test’s creators wanted it to be left open to interpretation. 

What does the “Eliminate Barriers to Innovation Act of 2021” act propose?

The bipartisan bill wants Congress to establish a working group within 90 days of its approval, consisting of SEC and CFTC representatives as well as non-governmental members. 

Private sector representatives should ideally come from these fields:

  • a FinTech company
  • financial services institution.
  • Small businesses using FinTech investor protection groups 
  • institutions that support investments in underserved businesses. 
  • A minimum of one academic researcher. 

The working group would be obligated to release a report within 12 months that analyzes current regulations and their effect on primary and secondary markets in the US, as well as the country’s present competitive standing. 

The report will also look at the following:

  •  legal treatment of crypto custody
  • Private Key Management and cybersecurity
  • Future best practices for the prevention of fraud, protection of investors, and other related issues
  • recommendations to improve the primary and secondary digital asset markets, specifically “fairness, orderliness, integrity, efficiency, transparency, availability and efficacy.”

Bill gains industry support

The forward-thinking bill has received strong support from the crypto industry, in particular from the Chamber of Digital Commerce, a leading blockchain advocacy organization that recently published a strong letter addressed to president Biden, urging him to reform blockchain policy.

The organization has been involved in important regulatory innovations in the last couple of years such as the Joint Working Group’s 2020 release of the InterVASP IVMS101 messaging standard to help standardize information sharing between virtual asset service providers (VASPs) as part of their FATF Travel Rule obligations. 

According to Amy Davine Kim, their chief policy officer, the incoming legislation aims to effect a more organized, complete, and optimal regulatory framework for cryptocurrencies in the United States. 

By trying to bring together the SEC and the CFTC in a more structured manner and allowing a vehicle for it to find a solution to some of the core issues that have historically impacted legal clarity in the crypto industry, Kim said that the US now has the opportunity to address these issues in a methodical way with a number of stakeholders. 

The progressive digital asset bill appears to enjoy broad support from both sides of the USS political spectrum, and was supposed to be introduced on Monday for a vote by the full House of Representatives. 

Unfortunately it was pulled as a result of procedural actions by the Freedom Caucus. 

Nevertheless, the bill’s cross-party support indicates a growing understanding from politicians that the United States can no longer delay cleaning up its regulatory policy pertaining to crypto assets.

U.S’ regulatory uncertainty harming its crypto industry

Cryptocurrencies like Bitcoin and Ethereum are enjoying an unprecedented renaissance thanks to the convergence of increasing mass retail and institutional adoption, dynamic new technological innovations like decentralized finance (DeFi), non fungible tokens (NFT) and more cohesive global regulatory guidance from the likes of the Financial Action Task Force (FATF). 

With blockchain and cryptocurrency innovation rocketing at a breakneck pace and countries vying for supremacy as the new digital financial sector rapidly takes shape, the States’ frustratingly confusing regulations have been found sorely lacking in recent years. 

Mired in controversies and bogged down by increasing red tape, bureaucracy, and sometimes downright spiteful regulations in 2020 driven by crypto naysayers like Jay Clayton from the SEC and Treasury Secretary Steven Mnuchin (rumored to be behind FinCEN’s controversial “private wallet” rule) the crypto industry has struggled to graduate from second-class economic citizens to its rightful place as builders of the new digital financial system. 

This was mainly attributed to mainstream concern over systemic anti-money laundering and counter-terrorism funding (AML/CFT) violations as well as the erosive impact crypto may have on the U.S. Dollar’s hegemony as the world’s preferred currency. 

Hopes are high that things are about to change. Crypto and blockchain expert Gary Gensler is set to fill Clayton’s leadership at the SEC and forms an integral part of the Biden administration’s plans to help the U.S. once again regain its competitive edge in the financial and technological sectors. 

It seems it’s finally becoming clear to the U.S.’ powers-that-be that time is running out for the United States to reclaim its throne in terms of blockchain innovation and leadership and that action simply has to be taken. 

As a result, there is cautious optimism that clear regulations will be forthcoming in 2021 that will help to clarify once and for all the US government’s policy on cryptocurrencies. If not now, then when?

Written by Werner Vermaak

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