US Cryptocurrency Bill Proposes Treating Bitcoin as a Commodity

This Tuesday, Sen. Cynthia Lummis (R-WY), together with Sen. Kirsten Gillibrand (D-NY), introduced the Responsible Financial Innovation Act. The bill aims to reach a balance between consumer protection and safeguarding digital asset innovation. Most importantly, it should officially classify nearly all digital assets including Bitcoin as tax-favorable commodities.

Crypto-friendly Senators Propose Radical Bill

Sen. Lummis is a crypto-friendly politician, known for her role in crafting the Wyden-Lummis-Toomey amendment for the controversial $1.2 trillion infrastructure bill. Although the amendment failed, its positive broker clarification appears in the 69-page bill once again.

Likewise, Sen. Lummis has a personal stake in the matter, as she is estimated to own between $100k – $250k worth of Bitcoin, according to 2022 financial disclosures. However, despite the proposed bill being bipartisan, it is unlikely it will pass in the present Democrat-controlled Senate configuration.

Nonetheless, due to its comprehensive nature, it is worth noting how Lummis-Gillibrand goes about cutting the Gordian knot of crypto classification.

Ancillary Assets: Cornerstone of the Lummis-Gillibrand Crypto Bill

Those who have been paying attention may have noticed there has been a proverbial turf war between agencies, as to which one will regulate digital assets. Specifically, between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).

Conversely, the classification of digital assets has been tugged between commodities and securities. The latter refers to having a stake in business/government assets, while commodities refer to more tangible goods. The Lummis-Gillibrand bill leans on the side of commodities by relying on the concept of “ancillary assets” governed by CFTC:

• Ancillary assets are digital assets that may be controlled by a company, therefore not fully decentralized. However, this doesn’t automatically mean they are securities as per the Howey test.
  
• Instead, they are still commodities because they are not equity, debt, represent liquidation rights, or created for profit-making.
  
• In contrast, fungible assets that constitute investment contracts are under the SEC’s supervision. Therefore, this excludes unique collectibles such as NFTs.

If such ancillary assets pass the bill’s criteria, by reporting to the SEC twice per year, they will be deemed as commodities. Much of the bill details procedures to make that happen.

Practical Implications of the Responsible Financial Innovation Act

Because the overwhelming number of cryptocurrencies would be classified as commodities, both the SEC and the IRS would have less leeway. Namely, digital assets gained from either staking or mining would not count as taxable income, until they are sold.

Likewise, crypto transactions of up to $200 would be excluded from taxpayers’ gross income if they are used for payments. Similarly, lending via smart contracts would not constitute taxable events. The bill would further require the IRS to clarify all guidelines related to airdrops, mining, staking, hard forks, merchant integration, and stablecoins.

Stablecoin payments themselves would be legally defined as “indebtedness”, following the SEC definition as “any obligation (whether incurred as principal or as surety) for the payment or repayment of money whether present or future”.

With all the terms clarified, blockchain companies would finally know how they will be legally treated based on the digital asset’s purpose. Additionally, the broker definition from the previous infrastructure bill amendment would relieve miners and wallet developers from tax-reporting duties.

Consumer Protection and CFTC Expansion

What happens if a large digital exchange goes bust, or a digital asset fails completely, like what happened with Terra’s LUNA/UST? The bill would require blockchain companies to provide full disclosure on their reserves, including nearly 100% 1:1 stablecoin backing.

By the same token, digital asset exchanges would have to be registered, under the CFTC supervision. The bill also lays the groundwork for future legislation, by requiring a multi-year study on consumer protection. CFTC would further expand its responsibilities into crypto spot markets.

Right now, CFTC can only regulate trading in commodities derivatives. In turn, just like companies pay fees to the SEC for supervision, so too would CFTC receive new sources of income from crypto businesses.

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Is Potential CFTC Takeover a Good Move for Crypto Space?

Due to the unlikely scenario for the Lummis-Gillibrand bill to pass, it should be best viewed as a testing framework. One in which digital asset owners benefit by not having to deal with the SEC’s vague, expensive and burdensome rules. Reminder, last year at the International Swaps and Derivatives Association (ISDA), SEC Chair Gary Gensler made it clear he views most coins as securities.

“The fact is, most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits. That’s the hallmark investment contract or security under our jurisdiction,”

Gary Gensler at ISDA’s AGM

Ancillary digital assets cut into SEC’s territory, but still reserve a minor place for SEC’s supervision. Therefore, one should view this bill as a continuation of the inter-governmental turf war. At the present state of the bill, the crypto lobby is better served under the CFTC’s charge.

After all, commodities are lightly regulated compared to securities. However, based on the legislative process thus far, the bill will likely be diluted with some parts finding their way into other proposals.

Which lobby will win in the end? The SEC, or CFTC which has one-sixth of the SEC’s budget? Let us know in the comments below.