Market Byte: What’s in the New Bipartisan Crypto Bill?


The U.S. has one of the most robust and respected financial systems in the world, and historically regulation played a major role in protecting investors while enabling efficient markets. But blockchain technology, and smart contract programming specifically, introduce public transparency and code-based rules that challenge historical norms or even clash with long-established rules. Today, developers of decentralized protocols and applications are tasked with navigating the uniquely fragmented nature of the U.S. regulatory system. Is a product a security, and therefore subject to oversight from the SEC? Or a derivative subject to the Commodity Futures Trading Commission (CFTC) oversight? Or, is the product overseen by one of the many other regulators, including Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Financial Crimes Enforcement Network (FinCEN), and/or state-level regulators? (Taxation is an entirely different beast, as our CFO Edward McGee discussed in a recent interview).


Ensuring compliance with our complex regulatory regimes can be prohibitive without providing additional protections. For example, SEC regulations are focused on disclosing material information (e.g. management’s outlook and financial statements in 10-K’s), but most smart contract programming and token movement happens on public blockchains that lack some of these information asymmetries. Should these types of obligations exist for a product run by a DAO in which material information about it is already publicly available?


All of this is to say that when Senators Kirsten Gillibrand and Cynthia Lummis announced their Responsible Financial Innovation Act (the “RFIA”) this week, the industry was not only ready for it, but took meaningful note of the bipartisan support the proposed legislation emerged under. Here are some of the key topics that we’re talking about within Grayscale’s legal team:


Crypto as a Commodity


In one of the most significant and widely-discussed provisions of the RFIA, “Digital Assets,” or most modern crypto-assets tracked by a distributed ledger, are “presumed” to be commodities under the CFTC’s jurisdiction. Current CFTC Chair Rostin Behnam noted at a June 8 Washington Post event that “on a periodic basis, and using Bitcoin as an example, as a commodity it doesn’t make sense to have an 8-K, S-1, 10-K or 10-Q.” Under the terms of this bill it seems most common crypto transactions would be presumed compliant with applicable regulation without the less congruous requirements of securities laws.


Furthermore, it would establish a sub-category of “Digital Assets” called “ancillary assets,” which are not fully decentralized and benefit from a central team or company. We think this is one of the more interesting new ideas in the bill. If the bill passes, ancillary assets would include tokens that were originally sold before launch (possibly pursuant to a Simple Agreement for Future Tokens or token warrant, for those familiar with early-stage crypto financing) and whose value still primarily depends on a centralized group.


The RFIA would establish that these types of tokens are commodities, not securities. However, the bill would also subject the entities who issue them to additional reporting requirements, so long as their value still depends on their efforts (or if certain other requirements are met). This change would help Grayscale in assessing emerging tokens against our rigorous, multi-step vetting process when considering their inclusion in our product family.


NFTs, DAOs, and Insider Trading


While the bill delineates a variety of key attributes embedded in crypto-assets themselves, it is mostly silent on more cutting-edge technologies, like decentralized finance and NFTs. It provides some clarity around taxation for very specific kinds of DAOs, but generally leaves lots of room for future discussion. This seems helpful as these technologies may be too new to intelligently legislate, and this absence allows for their continued evolution before setting strict legislation which could affect their development or functioning.


There are additional open questions about how the RFIA will affect insider trading. The bill acknowledges that some digital assets (specifically ancillary assets) are essentially managed by centralized teams, but it clarifies that the securities laws designed to prevent insider trading are not applicable to the digital assets themselves. While there have been some theories advanced for protecting against insider trading of these kinds of assets, they are generally considered new and untested with a high burden of proof. You can read about one real-world example of the difficulties in prosecuting insider trading in a non-securities context from perennial Grayscale favorite Matt Levine. It’s possible that Congressional staff may want to see adjustments to account for the possibility of insider-trading ancillary assets before passing the RFIA.


Crypto Exchanges and GBTC ETF Conversion


The RFIA contains language providing a path for centralized crypto exchanges to register and submit to the CFTC’s jurisdiction. Furthermore, it seeks to address concerns we have seen around fraud and manipulation that have been the focus of certain regulators and policy makers, as they compare crypto exchanges to nationally regulated exchanges.


Grayscale’s Chief Legal Officer Craig Salm laid out the case for why we believe the GBTC ETF should be approved as-is in a blog post earlier this year. We believe the RFIA would further strengthen these arguments by providing this path forward for exchanges, including exchanges that are used to price GBTC through the CoinDesk Bitcoin Price Index (XBX), to register with the CFTC. Legislation of this caliber would help improve communication between exchanges and support maturation of the ecosystem, which we believe would be an overall net positive for market participants.


So, where does this leave us? 


We’ve focused on sections that are particularly relevant to Grayscale’s business and our investors, but the bill covers a broad swath of issues related to digital assets, including taxation, consumer protection, stablecoins, national security, energy consumption, central bank digital currencies, and more. All 69 pages are available to read here.


On paper, we think there’s a lot to be happy about. Crypto continues to have momentum in DC on the heels of the White House executive order. While the bill’s introduction is merely a first step, we join other industry heavyweights in lauding the increasingly bipartisan support for crypto across the U.S. government – something that was unheard of in the crypto industry merely one year ago. It’s yet another indicator that this asset class is here to stay, and that’s worth celebrating.

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