- The revised Lummis-Gillibrand Crypto Bill gives the CFTC oversight of crypto exchanges and pushes the SEC to a less prominent role.
- The bill places an emphasis on customer protection by demanding full segregation of customer assets and stricter risk management for crypto lending.
- The legislation includes a definition for DeFi, outlining strict rules for when a software project must be registered as an exchange.
The second iteration of the Lummis-Gillibrand Crypto Bill proposes giving the Commodity Futures Trading Commission (CFTC) an elevated role in the regulation process. The revised bill, introduced by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.), stipulates that crypto exchanges be overseen by the CFTC and requires all stablecoin issuers to become regulated depository institutions.
This change in legislation moves the U.S. Securities and Exchange Commission (SEC) to a less prominent role, particularly if the crypto assets involved do not give the investor a financial interest in a business. These changes are set against the backdrop of the SEC’s recent aggressive moves against notable crypto firms such as Binance and Coinbase, which they have accused of operating illegally.
The new bill is seen as an attempt to strike a balance between the Republican and Democratic views on crypto regulation. This is vital as the current 50-50 split in the Senate necessitates bipartisan support for the legislation to pass. This latest version of the bill has been hailed as a significant step forward by industry stakeholders, but it is not yet clear when it will reach the Senate floor for voting.
The CFTC and the Crypto Industry
The bill outlines that most crypto tokens fall under the CFTC’s commodities space and assigns the agency power over crypto trading. The CFTC and SEC will receive equal funding ($500 million each) and hold shared responsibility in a new self-regulatory organization (SRO) for crypto, described as the “consumer protection and market integrity authority.”
Furthermore, the bill advocates for improved customer protection by calling for customer assets to be fully segregated and imposing new risk-management standards for crypto lending. The proposed legislation also outright bans “rehypothecation,” a practice where crypto firms use customer assets to extend their own credit.
Addressing Stablecoins and Decentralized Finance
Another key aspect of the bill addresses stablecoins – typically dollar-based tokens – and mandates they can only be issued by banks or credit unions regulated by the federal or state governments. The bill also introduces a new charter through the U.S. Comptroller of the Currency to license stablecoin issuers.
Interestingly, Lummis and Gillibrand also propose a definition for decentralized finance (DeFi), setting strict rules for when a software project crosses the line into a centralized business effort, at which point it must be registered as an exchange. This is a notable inclusion as previous regulatory proposals have struggled to encompass DeFi.
Looking Ahead
Despite these proposed changes, significant challenges lay ahead for crypto regulation. With the 2024 campaign season looming, there is less time for debate on complex issues like this. The crypto industry also faces resistance from the SEC, which has been pushing back against efforts to rewrite rules to accommodate the digital-asset industry.
The introduction of the Lummis-Gillibrand 2.0 Bill represents a significant advancement in crypto regulation, reflecting the growing importance and influence of cryptocurrencies in the financial world. As we look ahead, the key will be to strike a balance that allows innovation to thrive while providing a robust regulatory framework to protect investors and maintain market integrity.
