Senators’ Draft Crypto Bill Is Already Facing Industry Backlash

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Legislation expected to be released within the next few weeks would overhaul the way cryptocurrencies and digital assets are regulated and leave the Securities and Exchange Commission with significant oversight powers, according to a draft of the bill reviewed by Barron’s.

Some industry officials are already trying to change many of the proposals within the draft.

The bipartisan bill, written by Sen. Cynthia Lummis (R.-Wyo.) and Sen. Kirsten Gillibrand (D.-N.Y.), would be the latest attempt by lawmakers to craft a regulatory regime for crypto, which in the past 13 years has grown from a little-known cryptography project to a $1.4 trillion market without much clarity on how the tokens fit into existing law. A bipartisan group of lawmakers in the House of Representatives released their own bill in late April with a different regulatory approach.

A March draft of the Senate bill would leave the SEC in charge of overseeing a significant part of the crypto industry while moving some responsibilities to the Commodity Futures Trading Commission. The document also outlines a path to create a new self-regulatory organization for the crypto industry to help police itself.

The legislation would require crypto issuers to file information with the SEC if an average of more than $5 million worth of their tokens trades daily and if it “has engaged in entrepreneurial or managerial efforts that primarily determined the value” of the token. The tokens themselves wouldn’t be securities. The disclosures could stop if the trading value fell below the threshold or if the issuer and major owners didn’t make those business efforts.

The 75-page document also establishes a process for banks and credit unions to issue stablecoins and creates a new kind of special-purpose bank charter limited to stablecoin issuance that would have tailored capital requirements. Unlike traditional cryptocurrencies, the value of stablecoins are pinned to the value of other assets. The largest such coins are pegged to the U.S. dollar, which issuers typically achieve by maintaining an equivalent amount of dollar-based reserves.

Most crypto trading would be within the purview of the CFTC, though issuers might in many cases still have to file disclosures with the SEC for a period after a coin’s debut. Still, the draft legislation does include a path for token issuers to eventually extricate themselves from SEC oversight, something crypto advocates have wanted.

The draft would also open the path for a new self-regulatory organization (SRO), akin to the Financial Industry Regulatory Authority, or FINRA. SROs are run by members of the industry who set standards and perform some enforcement actions themselves with authority delegated by federal agencies.

Whether tokens should be treated as securities, commodities, or something else has long been debated by regulators and the industry. SEC Chair Gary Gensler has said he believes most tokens are securities under the law right now, meaning many issuers would be held to enforcement actions unless the law changes or a court said his interpretation was incorrect.

The senators are actively revising the bill, partly in response to industry feedback and the greater involvement of Sen. Gillibrand. Crypto industry representatives have privately expressed their misgivings to the senators over many of the bill’s provisions, including the SEC’s continuing role in crypto oversight and the way the bill addresses stablecoins, according to two people familiar with the matter.

Talking points circulated among members of the Blockchain Association trade group and reviewed by Barron’s described the draft as proposing “an unprecedented and unworkable tripartite regulatory regime requiring coordination among the SEC, CFTC, and a new SRO.”

“This is a work in progress, and it’s super healthy to have back and forth and to provide feedback,” Blockchain Association Executive Director Kristin Smith told Barron’s.

A spokesperson for Lummis said the senators are open to making changes to the legislation, but that there “was never a question that bulk of the regulatory structure for digital assets needed to fall under the jurisdiction of the SEC and the CFTC” and that it was unlikely a bill could pass Congress without the SEC having a role. The spokesperson said several industry organizations and companies have been supportive of legislation’s direction.

Lummis is considered to be one of the crypto industry’s foremost supporters and an investor in

Bitcoin herself.

A spokesperson for Gillibrand said the senator has been taking input from industry stakeholders, consumer advocates, and others in order “to best develop a framework that promotes innovation, accessibility and flexibility, and also prioritizes consumer protection.”

It’s unlikely any crypto bill will pass Congress soon, in part because there’s little consensus among lawmakers about how to regulate crypto. The White House also recently embarked on a wide-ranging review of crypto policy that isn’t slated to end before the end of the summer, leaving little time to move forward with any major legislation on the issue before the November elections.

Write to Joe Light at joe.light@barrons.com