Gary Gensler, Rostin Benham, and the Battle for Regulatory Supremacy

Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced legislation on June 7, 2022 that would implement and divide oversight of the cryptocurrency market between the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). (David A. Lopez-Kurtz, National Law Review; Soyoung Ho, Thomson Reuters). Proposed legislation of this kind may feel anathema to the underlying premise of blockchain technology and its freewheeling pioneers.  Consequently, This proposed implementation and division of responsibility has sparked reactions from both key agencies as well as players in the cryptocurrency industry.

The sponsors of the Responsible Financial Innovation Act (“RFIA”) assert that "most digital assets are much more similar to commodities than securities." (Tory Newmyer, The Washington Post). The RFIA would put an end to the turf war being waged between the SEC and CFTC over crypto regulation by dividing digital assets into three categories: securities, commodities, and "ancillary assets." (Avik Roy, Forbes). Ancillary assets would constitute a new category of digital assets which, under the RFIA, would qualify as commodities. (Andrew P. Scott, et. al., Congressional Research Service). Ostensibly, the RFIA would define ancillary assets as a type of cryptocurrency that, "while fluctuating in value, do[es] not provide the holder with a ‘profit or revenue share’ or ‘other financial interest’ such as ‘debt or equity’ in the company issuing the tokens." (Avik Roy, Forbes). This framework would place Ethereum and Bitcoin, which account for nearly 60% of the cryptocurrency market, under CFTC oversight. (Paul Kiernan, The Wall Street Journal).

The RFIA would offer far more than merely drawing jurisdictional lines. If enacted, the RFIA would define and clarify taxation of digital assets. (Gamma Law). Under current law, whenever a cryptocurrency holder sells a digital asset, the holder may be liable for capital gains tax on the profits, even if the asset is used to merely purchase a good or service “because the transaction constitutes a disposition of that asset." Id. For transactions less than $200, the RFIA would institute a de minimis tax exclusion. Id. This exclusion would open the door for consumers to purchase goods and services using cryptocurrency without incurring capital gains tax, enhancing the utility of cryptocurrency for the average American consumer. Id.

If enacted, the RFIA would also affect the nascent "stablecoin" industry as well. Payment stablecoins are a digital asset that is pegged to the value of a currency or commodity. (Adam Hayes, Investopedia). Under the proposed legislation, depository institutions would be allowed to issue stablecoins through an approved process. (Andrew P. Scott, et. al., Congressional Research Service). In light of the TerraUSD collapse, the bill proposes that "any depository that issues stablecoins would be required to maintain high-quality liquid assets valued at 100% of the face value of all outstanding payment stablecoins." (Id.; Jesse Hamilton, Fortune). The bill would authorize the Office of the Comptroller of the Currency to charter and regulate national banks whose sole purpose is to issue stablecoins. (Andrew P. Scott, et. al., Congressional Research Service).

Predictably, the chairs of the SEC and CFTC have expressed dissimilar views on the merits of the RFIA. (Mayer Brown). CFTC officials have been bullish on the RFIA. At a Washington Post webinar, CFTC Chairman Rostin Benham stated his support for the proposal’s effort to draw a line between cryptocurrency assets that act as commodities versus those that mimic securities, arguing that Bitcoin and Ethereum fit into the former category. (Al Barbarino, Law360). Benham went on to argue that Bitcoin and Ethereum act as “stores of value,” and do not require the periodic disclosures mandated by the SEC. Id. Further, in a hearing before the Subcommittee on Commodity Exchanges, Energy and Credit House Agriculture Committee, CFTC Director of the Division of Market Oversight Vince McGonagle touted the agency's capacity to supervise and regulate digital assets. (CFTC). McGonagle cited the CFTC's track record of regulating exchange listed futures contracts on digital assets, numerous enforcement actions brought in the digital asset space, and the efficiency of the derivatives markets it has overseen for decades. Id.

SEC officials have struck a different tone regarding the RFIA. SEC Chairman Gary Gensler has maintained that the majority of cryptocurrencies “meet the definition of a security and should register with the [SEC].” (Paul Kiernan, The Wall Street Journal). Following the bill’s introduction, Gensler stated the SEC was not looking to expand its jurisdiction, “but these tokens are being offered to the public, and the public is hoping for a better future. That’s the characteristics of an investment contract,” a type of security falling under SEC purview. (Paul Kiernan, The Wall Street Journal). Gensler further suggested a legislative shift on cryptocurrency may have implications for mutual funds and stock exchanges: “We don’t want to undermine the protections we have in a $100 trillion capital market . . . . Like behaviors should have like treatment.” Id.

Players in the cryptocurrency industry have made a prudent push to prepare for and even shape new regulation of the industry by hiring or considering advice from former government officials and regulators. (Paul Kiernan and Dave Michaels The Wall Street Journal). Cryptocurrency firms and investment funds have brought on former chairs of the CFTC,  chairs of the SEC, U.S. Senators, a White House Chief of Staff, and a Treasury Secretary. Id. These efforts have borne fruit with the more industry-friendly CFTC seeing its role expanded under the RFIA proposal. (Tom Zanki, Law360). Crypto industry players are satisfied to see that the SEC may be taking a back seat to the CFTC in the digital space, as cryptocurrency lobbyists have been vocal in their dissatisfaction with burdensome and costly SEC regulation and scant guidance on which assets are classified as securities. (Paul Kiernan, The Wall Street Journal).

The RFIA holds promise for increased regulation in the crypto realm. While the bill is not on track to be codified this year, its introduction demonstrates a push by Congress to account for the rapid growth of digital assets. (Mayer Brown). The federal government has never been accused of speedy and efficient work, and this legislation will be no exception; crypto industry sources expect a prolonged legislative process with at least four Senate committees expected to claim jurisdiction over portions of the bill. (Tory Newmyer, The Washington Post). The “wild west” era of crypto is coming to a close as the ever-expanding administrative state seeks to settle the previously uncharted territory.