How Legislation Could Have Reshaped the Bitcoin Crash
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The price of bitcoin, along with other cryptocurrencies, has crashed. New legislation seeks to better inform consumers about the risks in digital assets and minimize the potential for losses by establishing a clearer regulatory framework.
The effects of the COVID-19 pandemic are still felt on the digital assets markets two years later, with cryptocurrencies being the worst hit asset class. Wall Street fell into a bear market following fears about the fragile economy, and rising rates sent the S&P 500 down. Bitcoin fell below $19,000, its lowest mark since December of 2020 and down from late last year's peak of $68,990.
As earlier reported by the government, skyrocketing inflation could prompt the Federal Reserve to announce another sharp interest rate hike. Fed officials are likely to boost borrowing rates higher than anticipated due to inflation at a four-decade high of 8.6%. Some economists argue that the Fed might raise its short-term benchmark rate by three-quarters for the first time since 1994. All these are measures to protect the consumer from the global recession.
On June 7, 2022, U.S. senators Kirsten Gillibrand of New York and Cynthia Lummis of Wyoming released the long-awaited bipartisan bill (Responsible Financial Innovation). The legislation aims to create a regulatory framework for digital assets, encourage responsible financial innovation, and enhance transparency and robust consumer protection. Other than creating a regulatory framework for cryptocurrencies, it also aims to settle the dispute between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over cryptocurrency jurisdiction.
The Responsible Financial Innovation Act and what it contains
The act is bipartisan legislation introduced by Senator Gillibrand of the Senate Agricultural Committee and Senator Lummis of the Banking Committee. This act is considered the most elaborate bipartisan legislation regulating blockchain and digital assets industries. The Lummis-Gillibrand bill establishes a regulatory framework that develops clear standards, defines jurisdictional boundaries, protects consumers, and spurs innovation in the digital asset industry.
The bill also clarifies certain regulatory issues and maintains the flexibility to accommodate the ongoing evolution of the digital assets market. This legislation integrates digital assets into law by enhancing consumer protection and encouraging responsible innovation, flexibility, and transparency. Here are some of the best provisions of the Responsible Financial Innovation Act that could salvage the situation in the crypto industry:
Definition of digital assets
There are no common definitions for digital assets. However, the Lummis-Gillibrand bill establishes a definition for digital assets that will spark discussions about digital assets regulation.
A distinction between commodities and securities
As a measure to settle the jurisdictional dispute between SEC and CFTC, the act makes a clear distinction between securities and commodities by looking at the purpose of an asset and the powers it conveys to the consumer. Thus, it gives digital asset companies the right to define their regulatory obligation and gives regulators the mandate to enforce existing commodities and securities trading laws.
Regulatory authority over spot markets
The bill assigns clear regulatory authority over the digital assets spot market to the CFTC, which aligns well with its purview over other markets. That decision was informed by the understanding that digital assets are more like commodities than securities. Therefore, digital assets like bitcoin and ether that meet the definition of a commodity and comprise more than half of the digital market capitalization will be regulated by CFTC.
Creation of an advisory committee
The bill also establishes an advisory committee comprising stakeholders, including advocacy groups, crypto industry personnel, federal and state regulators, and digital asset experts knowledgeable in financial literacy, consumer protection, financial inclusion, and consumer education. The committee will study the ever-evolving crypto industry and make appropriate recommendations based on new trends and development so that regulations remain relevant. They also develop guiding principles and advise lawmakers on the fast-growing technology.
Workable structure for taxation of digital assets
The growth in use and legitimacy of digital assets is inevitable, and it's imperative that governments make it easier for its citizen to use them. The bill creates a de minimis exemption for people to make purchases with virtual currency without accounting for and reporting income. It also clarifies tax treatments for various actors and actions in the industry like miners and other validators for income tax purposes.
Disclosure requirements for digital asset providers
Consumer education must remain the top priority for digital asset service providers. The act's disclosure requirements on digital asset providers will ensure that customers fully understand the products they intend to purchase, their rights, and the associated risk of engaging in digital assets, including digital asset lending.
Steve Larsen, CPA, CFP® is a co-founder of PlannerDAO, co-founder of the Certified Digital Asset Advisor (CDAA) designation and an adjunct professor of finance at Gonzaga University where he teaches classes in cryptocurrency and financial planning. Connect with Steve Larsen and learn more about his work at cryptofp.com.