The Breakdown - The First Comprehensive US Crypto Legislation Is Here

Episode Date: June 8, 2022

This episode is sponsored by Nexo.io, NEAR and FTX US.    After months of anticipation, new landmark crypto legislation has arrived. Senators Cythnia Lummis (R-Wyo.) and Kirsten Gillibrand (D-NY) released their Responsible Financial Innovation Act today. The bill covers a huge swath of the digital asset space, from stablecoins to tokens. In this episode, NLW recaps the key features of the bill as well as shares the community’s first impressions.  - Nexo is an all-in-one platform where you can buy crypto with a bank card and earn up to 16% interest on your assets. On the platform you can also swap 300+ market pairs and borrow against your crypto from 0% APR. Sign up at nexo.io by June 30 and receive up to $150 in BTC. - NEAR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NEAR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Find out more at NEAR.org. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Consensus 2022, the industry’s most influential event, is happening June 9–12 in Austin, Texas. If you’re looking to immerse yourself in the fast-moving world of crypto, Web 3 and NFTs, this is the festival experience for you. Use code BREAKDOWN to get 15% off your pass at www.coindesk.com/consensus2022. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “Catnip” by Famous Cats and “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: JTSorrell/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, June 7th, and today we're discussing the most significant attempt yet at comprehensive U.S. crypto legislation. Before we dive into this important topic, I have just a couple housekeeping notes. There are two ways to listen to the Breakdown podcast. You can hear it on the Coin Desk Podcast Network feed, which comes out every day in the afternoon, and features the breakdown alongside other great Coin desk shows,

or you can listen to it on the Breakdown Only feed, which comes out in the evening. Wherever you listen, if you're enjoying, I would so appreciate it if you take the time to leave a rating or a review. And finally, as always, in addition to them being a sponsor of the show, I also work with FTX. So a little over a week ago, I did a show called Bitcoin Isn't A Political, but it is nonpartisan. The point of the show was pretty well encapsulated by the title, but one of the main examples I pointed to of this nonpartisan nature or bipartisanship in practice, was legislation in the works from Senator Cynthia Lummis, a Republican from Wyoming, and Senator Kirsten Gillibrand, a Democrat from New York. Just to give a sense of Senator Lummis' history with Bitcoin,

Bruce Fenton today tweeted, Senator Lummis is a Bitcoin OG. She attended our third Satoshi Roundtable seven years ago and was in the room when attendees like Roger Verr and Adam Back debated the block size. Given this, it might not surprise you that Senator Lumas has been working for a while on comprehensive crypto legislation. But in March, we found out that she was being joined as a co-sponsor by Senator Kirsten Gillibrand. Now, on most issues, these two could not be farther apart, and by all accounts, Senator Gillibrand

has absolutely thrown herself into this thing as well. But let's also zoom out and give a little bit more political context to Bitcoin and crypto in the U.S. in general. The Washington era of crypto in the U.S. really kicked off last summer in a huge way with the battle around the infrastructure bill. Basically, what was contained in that bill as part of a way to pay for the bill was a technical redefinition of broker that would have created an impossible situation for market participants in crypto, such as validators and miners who have no custodial information. Theoretically, the government was trying to get unpaid crypto taxes, but in practice, it was likely to have significant negative ramifications for the industry as a whole.

We lost that battle pretty much on a technicality, but the fight still had some big lasting impacts. It helped consolidate the crypto lobby and also demonstrated just a very much. how loud this industry could be. Since then, a number of things have happened. There has been an ongoing jurisdictional struggle to regulate crypto, i.e. offices inside the U.S. government, such as the SEC and the CFTC, jockeying for a position. Earlier this year, we got the Biden administration executive order, which was an attempt to resolve some amount of this jurisdictional struggle by having all sorts of different departments come together and give their take on important crypto issues through the lens of whatever their office happens to do. And then there's Congress,

who aren't sure that they want unelected officials to really be making those decisions about this important new frontier space. A lot of what we've seen thus far from Congress is smaller bills designed not really to be actually passed, but to signal discontent around how things are being handled. An example would be a bill that would specifically address this broker definition issue from the infrastructure bill last year. And so that is the context that the Lumas-Gillibrand Responsible Financial Innovation Act comes into. This is the first, large-scale attempt at comprehensive crypto legislation in America. What's more, it has by far the most political intention behind it. These aren't two senators just introducing this for the sake of it.

They are taking major time and spending significant political capital on it. So let's talk about what's in the bill and then the community's reaction. I'm going to use the acts section by section overview to give you a sense of what's going on here. Section one is definitions. Now that sounds basic, but can actually be pretty thorny. The section creates definitions for terms like digital asset, virtual currency, payment stable coins, smart contract, etc. Section 2 focuses on responsible taxation of digital assets and has a bunch of the issues that we were sort of expecting and fall in that common sense but good for the industry category. This section includes the de minimis tax exemption, which basically says that transactions under $200 using virtual currency aren't going to be taxed,

like it's a sale of an asset. This obviously makes crypto as a medium of exchange, as a payment method far more viable. This section also includes an updated broker clarification, i.e. what we were effectively fighting for in the original infrastructure bill provision process. The language used in the bill is actually identical language to a previous bill from Senator Patrick McHenry earlier this year. A potentially big part in this section is clarifying gains from mining and staking. The official summary puts it like this. Digital assets obtained from mining or staking activities do not form a part of a taxpayer's gross income until the disposition of those assets. In other words, you're taxed when you sell, not when you accrue the rewards. Another common sense provision from this section is that

digital asset lending agreements are not generally taxable events, same principle as securities lending. Then they get into a few issues which have been a little dicier. The bill basically compels the IRS to, quote, adopt guidance or clarifications on longstanding issues, such as forks and air drops, merchant acceptance of digital assets, mining and staking, charitable contributions of digital assets, and more. It also discusses retirement investing, which has been a hot button issue lately. The bill, quote, requires the government accountability office to conduct an analysis of opportunities and risks and report back to Congress, the Treasury Department, and the Labor Department. Finally, in this section, one that is seeing a lot of commentary is around Dow's.

The summary of Section 204 states, quote, certain decentralized autonomous organizations or DAOs are business entities for the purpose of the tax code, requires that a Dow be properly incorporated or organized under the laws of a jurisdiction, as a decentralized autonomous organization, which may include an LLC, corporation, partnership foundation, cooperative, or similar organization. Now, there has been a lot of chatter on this, so we will come back to it. Section 3 is called Responsible Securities Innovation, and this is a huge deal. The framework basically creates a new precedent that can make digital assets that appear security-like, formally, not securities, while still requiring a different type of disclosure for them. The summary reads,

For the first time, this bill makes a clear distinction between digital assets that are commodities or securities by examining the rights or powers conveyed to the consumer, giving digital asset companies the ability to determine what their regulatory obligations will be, and giving regulators the clarity they need to enforce existing commodities and securities laws, bringing digital assets into the regulatory perimeter from the current vacuum. Lumis Gillibrand accomplishes this by codifying existing precedence under the Howey test that an ancillary asset provided to a purchaser under an investment contract is not inherently a security. Digital assets which are not fully decentralized and which benefit from entrepreneurial and managerial efforts

that determine the value of the assets, but do not represent securities because they are not debt or equity or do not create rights to profits, liquidation preferences, or other financial interests in a business entity, will be required to furnish disclosures with the SEC twice a year. Ancillary assets in compliance with these disclosure requirements are presumed to be a commodity. Now, it feels like this new category of ancillary assets, which meet parts of the Howie test in terms of benefiting from the work of others, but not other key parts such as the expectation of profits or financial gain, will be one of the most debated parts of this bill. Nexo lets you easily buy crypto with your bank card and earn industry-leading interest rates. Earn up to 16% on crypto and up to 12% on stable coins.

nexo makes passive income easy with interest paid automatically and daily with nexo you can also borrow against your crypto at zero percent apr and exchange over 300 pairs receive a welcome bonus of up to a hundred fifty dollars in bitcoin until june 30th at nexo dot io that's nexo This episode is brought to you by MIR, a climate neutral, high speed, and low transaction fee, layer one blockchain platform. NIR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NIR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Reimagined your world today at NIR. The breakdown is sponsored by FTX US. FtX US is the safe, regulated way to buy and sell Bitcoin and other digital assets,

with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Section 4 Responsible Commodities Innovation is probably the section getting the most play. Their summary reads,

Lumas Gillibrand grants the CFTC exclusive spot market jurisdiction over all fungible digital assets which are not securities, including ancillary assets, in addition to the agency's current jurisdiction over leveraged transactions. This will also be hotly debated as it gives the CFTC pretty much the primary role in regulating digital assets. Now, taking a step back on all of this, obviously it feels like this type of comprehensive legislation has taken a long time to get here. But as you can see, there are so many challenges in trying to shape these frameworks. Lemus Gillibrand effectively defines a new type of temporary sort of, but not exactly security that becomes a commodity, and then defines the powers and disclosures around that, and then figures out how to put it into law in the existing

legal framework. And the point is that all of that is a fairly significant task. Section And five is about responsible consumer protection and is largely just a slew of disclosures that help give consumers and potential investors interacting with digital assets more information. And then Section 6, Responsible Payments Innovation is the Stablecoin section and also getting lots of attention. To quote the summary, Lumas Gillibrand requires all issuers of payment stablecoins to, one, maintain high-quality liquid assets valued at 100% of the face value of all outstanding payment stablecoins, two, provide public disclosures on the assets backing the stable coin in their

value, and three, have the ability to redeem all outstanding payment stable coins at par in legal tender, establishes a detail, optional process for depository institutions to issue a payment stable coin. So this one is important, obviously. It defines who can issue a stable coin and make sure to say that it's not just the banks that exist today. It dictates a lot about what stable coins obligations are in terms of reserve asset disclosures, which, as I've said before on this show, is something that I think most of the

industry agrees with. For the sake of moving through this to get to some commentary, Section 7 is a lot of pretty wonky stuff on responsible banking innovation, and Section 8, the last section is about responsible interagency coordination. A lot of what's contained in Section 8 is future analyses around issues that seem important but that they're not ready to commit to law just yet. So, for example, Section 805 is an analysis of decentralized finance markets and technologies requiring the Treasury Department to study certain topics relating to decentralized finance. Section 806 is an analysis of energy consumption in digital asset markets.

Section 807 is an analysis of self-regulation and registered digital asset associations, and so on and so forth. There is so much in this bill to unpack that you're really seeing only the very beginning of surface analyses. Indeed, the authors of the bill themselves assume that the next step is going to be tons of discussion, discourse, provisions, etc. Senator Lummis tweeted this morning, Thank you for your patience.

I'm excited to finally get this out the door. There will almost certainly be provisions you like. Perhaps there will be provisions you oppose. Getting this right will be hard but worth it. Give me constructive feedback. Toying with a Git repo or some other tool to collect public comments. Thoughts on novel ways to do that are welcome. I think one area of commentary that I've seen come up most is nervousness

from the non-Bitcoin Web 3 community. There has been a fear which started before this particular bill was actually released, that this would be good for Bitcoin but really bad for DeFi or other novel areas of Web 3. Reviewing this and just seeing the first past takes, I tend to think that it's not so much that Bitcoin is prioritized. It's that the issues around something like Bitcoin have just been around longer and are better understood. There is, of course, a distribution chart of complexity when it comes to digital assets and getting a set of politicians to understand Bitcoin and stable coins is one thing.

Helping them understand the nuances of, for example, automated market makers is another. This, of course, doesn't mean we shouldn't try. And to the extent that Web3 advocates are worried about specifics that are contained within this bill, they should advocate loudly. Innovation should live or die by its own merits, not because someone in Washington does or doesn't get it. Adam Cochran wrote, wow, so first read some good stuff that moves us forward, but a lot of rough stuff. Overall, this gives U.S. crypto clarity, but it will have a huge.

huge cost in growing pains. A few of the things that Adam points out as potentially problematic. Registration requirements around Dow's are something that he flags, and he also has concerns around certain areas of defy. Quote, new disclosure requirements would make a non-run project's almost impossible to comply under the law. Anything that trades one digital asset meets the burden of being a digital asset exchange. Current language seems like it would include AMMs. Plenty of good in here to at least make clear crypto is allowed in the U.S. But it aims to aims to regulate it as strictly or even more strictly than banks and current financial services providers. Not a lot of room for Defi and none for Anon's or non-regulated DAWs. So as you can see,

nothing in that analysis is hand-wavy or frantic or overly hyperbolic. But someone who is in the category of being somewhat less concerned than Adam about some things was Gabriel Shapiro, who's been in Defi for a long time and who is the General Counsel at Delphi Digital. He wrote, it's overall a good deal on securities laws issues and went on, quote, most tokens with good lawyering presumed not to be securities. I'm unconcerned re-carve-out for tokens with dividends from an entity. Smart contract protocol fees are distinguishable. We can structure around this. Gabriel did go on to say, quote, that there is one glaring flaw in the bill. Digital asset exchanges include decentralized platforms, which arguably includes AMMs and other

smart contract protocols. But DAE's digital asset exchanges need to restrict whichever. assets trade on them. Obviously, this is impossible for AMMs to comply with as they allow permissionless listing. This potential issue with Defi protocols is the main flaw in the bill currently and contradicts its overall approach to DeFi, which is to simply order regulators to do reports on how best to handle DeFi. I think this must be fixed. He didn't agree even more strongly on Dow's, saying, on Dow's the Twitter threads you're seeing are wrong. There is no requirement that all Dow's must be incorporated as entities. This incorporation requirement is merely a condition to qualify for potentially beneficial default assumptions on Dow tax

issues. I expect most DAOs will ignore this and continue to follow top crypto lawyer advice, i.e. use independent offshore entities to receive profits or hold investments at arm's length while keeping the Dow itself unincorporated. The bill does not preclude this. He sums up, is this bill perfect? No. Does it embody perfect policy? No. Are some definitions bad? Yes. Do I have some fears of how the gaps get filled in by agencies like the SEC? Yes. But for those of us really in the trenches, it offers a rare glimmer of hope for creating a U.S. regulatory framework where devs don't have to lose sleep at night and can still build. Also, it's not going to pass this year, so let's comment and improve it. Alex Thorne, who's the head of firm-wide research at Galaxy Digital, definitely

agreed with this assessment of the timing. Lumis-Gillibrand bill will go nowhere near-term. Too comprehensive, no appetite for bipartisanship with elections soon, and not enough time on docket remaining this year much, let alone crypto. Some ideas may last for future attempts, but my bet is nothing happens anytime soon. Now, I think Alex may be being a little too dismissive, but the broader point that this is an opening salvo is 100% true. Still, from my perspective, looking at it in terms of where we are now starting this conversation in Congress as it relates to crypto assets, I agree wholeheartedly with Jake Trevinsky, where he writes, perhaps most important of all, it's amazing to see a bipartisan effort like this. Senators Lummiss and Jillibor.

are on opposite sides of many political issues in D.C. But the fact that they can work together on sensible crypto policy is a huge positive sign for the future. There will be a huge amount to unpack about this in the weeks, months, and perhaps even years to come. It is going to require a ton of engagement from people in this industry as well as in politics. My main takeaway, though, is this. We have a better starting point for this discussion now than we did yesterday. And that's something to be excited about. For now, I want to say thanks again to my sponsors, nexo.io, near NFTX. And thanks to you guys for listening.

Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.