In 2021, the crypto space saw major advances in mainstream recognition, as evidenced by, among other things, Tesla’s investment of more than $1.5 billion in bitcoin in February, Coinbase’s splash debut on the Nasdaq in April, El Salvador’s decision to make bitcoin legal tender in September, the first bitcoin ETF hitting U.S. exchanges in October, bitcoin prices topping at $69K in November, and the passage of the Infrastructure Bill in November, capped off by a House Financial Services Committee Hearing on Crypto in December.
However, one major problem is a lack of clear regulation and coherent legislation. The industry deserves to be recognized for its growth and also demands sophisticated and appropriate legislation to reflect its maturity and buttress its legitimacy, but most importantly legislation that promotes innovation. Most industry participants would welcome additional oversight in the form of an industry-specific regulator in hopes it will bring clarity, and perhaps an end to further sporadic and haphazard regulation. Of course, this also requires governance that won’t hinder the industry.
At present, numerous state and federal regulators have already attempted to stamp the industry with regulation and guidance.1 However, this is a significant part of the problem. Indeed, currently digital assets can be considered either commodities regulated by the Commodity Futures Trading Commission (CFTC) or securities regulated by the Securities and Exchange Commission (SEC) and can convert from one to the other as the result of changes in their structure, usage, and underlying protocols. Rather, the objective should be a single, educated and informed governing body that puts forward regulation appropriate for the industry. Whether that comes in 2022 or not is an open question.
In the background, U.S. legislators are looking to catch up with and better understand the space that has flashed on the scene with unprecedented speed. However, the digital asset industry should not be made to wait or otherwise suffer from incompatible legislation and patchwork regulation.
The Current Status of Digital Asset Legislation
Existing legislation inadequately addresses digital assets. In 2016, Congress formed the Congressional Blockchain Caucus, and the result was the introduction of only a handful of bills between 2016 and 2018. Meanwhile, federal laws, which were last significantly changed in 2010 by the Dodd-Frank Act, have not been amended to address issues specific to digital assets – a vast majority of which came into existence well after the enactment of Dodd-Frank.
In November 2021, President Joe Biden signed into law the Infrastructure Investment and Jobs Act (H.R. 3684). The Infrastructure Bill, among other things, contains a provision that would require brokers of digital assets (including cryptocurrencies and nonfungible tokens (NFTs)) to record and report transactions to the Internal Revenue Service in a type of 1099 form starting next year. The bill revised the definition of a broker to include “any person who (for consideration) is responsible for providing any service effectuating transfers of digital assets on behalf of another person.” The bill also amends the anti-money-laundering “cash reporting” requirements to include “digital assets,” thereby extending reporting obligations for certain transactions involving in excess of $10,000 in cash to also encompass transactions involving digital assets exceeding $10,000. This expanded language may extend reporting obligations and tax collection to facilitators of digital asset transactions, including U.S. digital asset exchanges and digital wallet providers, and may also include digital asset miners and other entities that do not facilitate transactions, thus requiring them to report certain information related to cryptocurrency transactions.
What We See on the Horizon
1. A Heavily Anticipated Executive Order from the White House
The Biden Administration is expected to release an Executive Order as early as February to outline a comprehensive government strategy on cryptocurrencies and ask federal agencies to determine the risks and opportunities presented by digital assets. Such a directive will put the White House front and center on U.S. policy toward regulation of digital assets and is expected to improve coordination between the various authorities currently monitoring and regulating the space.
2. Legislation to Exclude Digital Token Sales from the Definition of a Security
Since 2018, Congressional Blockchain Caucus members have been introducing bills to exclude digital tokens from the definition of a security. These bills are being revived, and include:
- The Token Taxonomy Act of 2021 (H.R. 1628) which seeks, among other things, to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a “security.”
- The Securities Clarity Act (H.R. 4451) which seeks to exclude investment contract assets from being considered securities, including for purposes of disclosure and registration. The bill defines an investment contract as “a tangible or intangible asset sold pursuant to an investment contract that is not otherwise considered a security.”
3. Legislation to Create Safe Harbor Protections for Industry Participants
On February 6, 2021, SEC Commissioner Hester Peirce proposed a regulatory safe harbor to protect crypto entrepreneurs engaged in the development of decentralized networks which utilize a token as a means of exchange on, or to provide access to, the network.
Representative Patrick McHenry (R-N.C.), Republican leader of the House Financial Services Committee, introduced a Clarity for Digital Tokens Act of 2021 (H.R. 5496) that would amend the Securities Act to create a safe harbor providing a grace period of exemption from Securities Act registration requirements.
Representative Don Beyer (D-Va.), Chairman of the U.S. Congress Joint Economic Committee, introduced the Digital Asset Market Structure and Investor Protection Act (H.R. 4741) which would amend the Securities Exchange Act to define a new type of security, specifically a “digital asset security,” and add issuers of digital asset securities to an existing provision for delayed registration of securities.
4. Legislation to Regulate Circulation and Use of Stablecoins
In addition to the above-anticipated Executive Order, the Biden administration has also called on Congress to pass legislation that would require stablecoins – any cryptocurrency designed or intended to have a relatively stable price, typically by pegging it to an external commodity or currency or otherwise having its supply regulated by algorithm – to be issued by federally-insured banks.
Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have both underscored the need to develop clear regulations to govern stablecoins.
- On November 1, 2021, the President’s Working Group on Financial Markets released a report and recommendations on stablecoins. Secretary Yellen was quoted as saying, “Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system” and “current oversight is inconsistent and fragmented, with some stablecoins effectively falling outside the regulatory perimeter.” In addition to reiterating the concern expressed by so many in the industry about haphazard and piecemeal regulation, Secretary Yellen tacitly acknowledged that this will continue while Congress works to catch up, stating “while Congress considers action, regulators will continue to operate within their mandates to address the risks of these assets.”2
- On December 15, 2021, likely foreshadowing change in 2022, Chairman Powell told the Federal Market Open Committee that “stablecoins can certainly be a useful, efficient, consumer-serving part of the financial system if they’re properly regulated. And right now, they aren’t.” On January 20, 2022, the Federal Reserve released its long anticipated white paper on central bank digital currencies (CBDCs). While outside the scope of the white paper, the release reiterates prior statements made by the report from the President’s Working Group on Financial Markets referenced above. Specifically, it reads “to address the risks of payment stablecoins, the [President’s Working Group] report recommends that Congress act promptly to enact legislation that would ensure payment stablecoins and payment stablecoin arrangements are subject to a consistent and comprehensive federal regulatory framework. Such legislation would complement existing authorities regarding market integrity, investor protection, and illicit finance.”
As detailed above, Representative Beyer’s bill proposes to create a regulatory regime for digital assets, including stablecoins, specifically by amending Title 31 of the U.S. Code. The amendment would require Treasury Department approval for the issuance or use of any “digital asset fiat-based stablecoin”, pursuant to an application process to be established by the Treasury Department in consultation with the Federal Reserve, the CFTC, and the SEC.
5. Broad-based, Industry Friendly Legislation
Perhaps of most interest to industry participants is the all-encompassing bill Senator Cynthia Lummis (R-WY) is planning to introduce in 2022. Senator Lummis is a member of the Senate Banking Committee, and an ardent crypto industry supporter and participant, who herself purportedly owns five bitcoins. Senator Lummis’ bill is expected to be a comprehensive digital asset policy bill, and is expected to cover everything from stablecoins to taxes and to introduce a new crypto-focused regulatory body under the joint jurisdiction of the SEC and the CFTC tasked with overseeing the crypto market specifically. Notably, Lummis’ support for the crypto industry in the past led her to ask Congress to block the nominations of Chairman Powell and Lael Brainard (former Under Secretary of the Treasury for International Affairs and member of the Federal Reserve Board of Governors) to the Federal Reserve over their “political approach to digital assets” in her home state of Wyoming, which has been a leader in passing crypto-friendly legislation.
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The cryptocurrency and digital asset landscape is projected to see much change in 2022, and there is a high likelihood that the industry will see new legislation. After a year of headlines and mainstream attention in 2021, industry participants are left to hope that future legislation will appropriately reflect the continued maturity and overall expansion of the crypto market, which fosters – not hampers – innovation.
If you have any questions about the issues discussed in this article, please contact any of the following attorneys, who are part of our Digital Assets and Blockchain Group.
A.J. Borrelli
aborrelli@riker.com
Hunt S. Ricker
hricker@riker.com
Labinot Alexander Berlajolli
lberlajolli@riker.com
Robert N. Holup
rholup@riker.com
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1 Numerous regulatory authorities have already taken steps to issue statements, guidance, statutes and/or regulations about the offer, sale and/or taxation of these assets – including the Commodity Futures Trading Commission (CFTC), the Consumer Financial Protection Bureau (CFPB), the Financial Crimes Enforcement Network (FinCEN), the Office of the Comptroller of the Currency (OCC), the Internal Revenue Service (IRS), the Federal Deposit Insurance Corporation (FDIC), the U.S. Department of Justice (DOJ), and other individual state regulatory bodies. This patchwork governance has left the industry with murky requirements and unclear rules of the road.
2 https://home.treasury.gov/news/press-releases/jy0454.
