As cries for cryptocurrency regulation continue to increase, experts say a recently proposed bipartisan Senate bill sets the stage for promising regulatory measures.
The Responsible Financial Innovation Act, introduced in June by U.S. Senators Kirsten Gillibrand, D-N.Y., and Cynthia Lummis, R-Wyo., establishes definitions for digital assets, creates an advisory committee to develop guiding principles and advise lawmakers on the rapidly developing technology, and gives regulatory authority for digital assets to the Commodity Futures Trading Commission (CFTC).
The main uncertainty regarding the cryptocurrency market has long been definitional, which is why the Senate bill is a positive step for cryptocurrency regulation, said Alma Angotti, a partner in Guidehouse's financial services segment and global legislative and regulatory risk lead. Guidehouse is a global market consulting company.
"This bill does a pretty good job," Angotti said. "It's very thorough; they tackle a lot of the uncertainty issues that were a problem."
Cryptocurrency regulation bill provides clear definitions
Angotti said the proposed cryptocurrency regulation bill provides much-needed definitions and clarity to institutions involved in the cryptocurrency market. For example, she said the bill clarifies when digital assets are considered securities and when they're considered commodities.
Securities are typically assets such as stocks and bonds, while commodities are items like metals and oil that investors purchase early on that will be delivered at a later date. They are both considered investments and traded on the stock market.
Alma AngottiPartner, Guidehouse financial services segment, global legislative and regulatory risk lead
When it comes to determining what digital assets are securities and commodities, the cryptocurrency regulation bill considers the purpose of the digital asset, as well as what power it gives the consumer, to make the determination. According to the bill, this gives cryptocurrency companies the ability to determine what their regulatory obligations will be and at the same time gives regulators clarity when it comes to enforcing existing securities and commodities trading laws.
The cryptocurrency regulation bill opted to give regulatory authority to the CFTC since digital assets that function more like commodities, including Bitcoin and Ethereum, comprise more than half of the digital assets market. Securities are regulated by the U.S. Securities and Exchange Commission.
By establishing clear definitions for the cryptocurrency market, Angotti said it allows the regulatory framework to fall into place. The regulation "may not be perfect," but investors and cryptocurrency companies will know how to operate if the bill becomes law, Angotti said.
"They've been working on this for a long time, and they seem to want to get it right," Angotti said.
Cryptocurrency regulation bill still needs fine-tuning
The U.S. is taking a gradual approach to outlining rules for cryptocurrency use and trading, said Will Cong, associate professor at the Cornell University SC Johnson College of Business.
President Joe Biden's executive order signed in March calling on the federal government to address the risks and benefits of digital assets and its underlying technology was "paramount," Cong said.
"It's an act to coordinate everyone and to standardize," he said. "We can't have too many standards, too many bosses, there's got to be one consistent regulatory framework. That's going to save the economy a huge amount because firms need to know how to stay compliant."
Gillibrand and Lummis' proposed cryptocurrency regulation bill is a "great start" toward establishing those standards for digital assets, but it's not perfect, Cong said. Ideally, Cong said he'd like to see certain changes in the bill, particularly regarding the issuance of stablecoins.
The bill establishes a 100% reserve requirement, meaning stablecoin holders can always redeem their stablecoins in exchange for the equivalent stable asset value from the stablecoin issuer. Cong said while this is good, the bill doesn't touch on other forms of stability measures associated with stablecoins, which he would like to see added to the bill.
"It's going to set a benchmark that people can build from," he said of the cryptocurrency regulation bill overall. "But I think some parts can be done more carefully."
How cryptocurrency regulation impacts businesses, tech development
Angotti said it could take years and additional efforts such as development of central bank digital currency before cryptocurrency is widely used by businesses.
While cryptocurrency itself may not be promising for businesses yet, Angotti said the blockchain technology it's built on has already impacted businesses, from financial institutions to supply chains.
"You see businesses using the technology to make their lives easier or take advantage of the distributed ledger," she said.
The cryptocurrency market faces other hurdles, such as the Bank Secrecy Act rule that requires financial institutions to share certain information with a financial institution it is transmitting funds to.
The SWIFT network was designed to solve this issue in traditional banking, but nothing similar exists for cryptocurrency yet.
"There have been some technology solutions that many exchanges are using. Some haven't implemented them yet, and there hasn't been an enforcement action yet," Angotti said. "But as soon as the technology is readily available, it wouldn't surprise me if there was enforcement action."
Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.