Senators Reintroduce Bipartisan Legislation to Create Digital Asset Regulatory Framework

Senator Cynthia Lummis (R-WY) and Senator Kirsten Gillibrand (D-NY) reintroduced a legislative proposal to establish a comprehensive scheme for the regulation of digital assets.

The legislators included a series of revisions to the "Lummis-Gillibrand Responsible Financial Innovation Act" initially proposed in June 2022 (see here). The proposal would address:

• Registration. The proposal would require (i) crypto asset exchanges to register with the CFTC, with the exception of "truly decentralized protocols" and (ii) payment stablecoins to be issued by a bank or credit union. In addition, algorithmic stablecoins would be classified as hybrid instruments under CFTC jurisdiction.
• Penalties. The proposal would create penalties for willful violations of anti-money laundering laws. The proposal would also incorporate several provisions originally introduced by the "Digital Asset Anti-Money Laundering Act" in 2022.
• Decentralized Exchanges. The proposal would provide risk management practices for centralized actors to interact with "decentralized crypto asset exchanges."
• FTX. The proposal includes a number of provisions aimed at preventing FTX-like bankruptcies from reoccurring, including: (i) mandatory segregation and third-party custody requirements; (ii) granting the CFTC the legal authority to supervise "affiliates, holding companies, and other potential conflicts of interest"; and (iii) limiting crypto asset lending, in part by banning rehypothecation.
• Customer Protection. The proposal would establish a customer protection and market integrity authority which the proposal stipulates "must be jointly chartered by both the CFTC and SEC." The authority would be responsible for (i) regulating, supervising and disciplining crypto asset intermediaries and (ii) would be governed through a board of directors "comprised by a majority of government officials and non-affiliated members of the public."
• Agency Funding and Revenue. The proposal would allocate $1.4 billion in appropriations over five years to Treasury, the CFTC, the SEC, the White House and other regulatory agencies. The appropriations would be paid for by (i) "making crypto assets subject to the wash sale rule" and (ii) "requiring intermediaries to mark their assets to market for tax purposes."