At Responsible Financial Innovation Act which was dated June 7, 2022 includes a comprehensive regulatory framework for digital assets and seeks to provide clarity on how digital assets, such as cryptocurrencies, are treated under U.S. securities law. The most important part of the bill is the U.S. Supreme Court’s decade-long age standard codification to determine whether a financial offering is a “security,” that is, Howy test.
If cryptocurrency is “security,” then the crypto issuing company must comply with Securities and Exchange Commission rules for registration and reporting — failure to do so could result in significant fines, such as $ 100 million SEC fine. issued by the SEC in 2021.
However, many in the industry believe that cryptocurrencies act more like commodities than securities and are more likely to be treated as such, according to Commodity Futures Trading Commission rules. The “security” vs. “commodity” debate has many practical implications for the cryptocurrency industry, as well as consumers, and has been heating up in Washington.
But RFIA, introduced June 7 by Sens. Cynthia Lummis (R-Wy.) And Kirsten Gillibrand (DN.Y.), are not the first time the federal government has attempted to classify cryptocurrency. In fact, the ethics body that governs the rules governing the personal financial affairs of federal officials – Ethics in Government and the Stop Trading on Congressional Knowledge Act (STOCK Act) – has considered “security” vs. commodity debate.
Lawyers and attorneys who outline RFIA also want to understand the contours of the ethics law before entering into a conflict because the rules are the rules that govern the wallets of federal officials.
Congress and the STOCK Act
The STOCK Act requires members of Congress and certain staff to report transactions related to certain assets within 45 days. in particular, transaction over $ 1,000 for “stocks, bonds, commodity futures, and other forms of securities” must be reported publicly.
both house and Senate the guidance explicitly treats cryptocurrencies as guaranteed, but only the House guidance defines the category that includes cryptocurrencies: “other forms of security.” Although House guidance is limited to applying to certain U.S. representatives and House staff, high -profile examples where members of Congress have reported (or failed) cryptocurrency transactions could create new norms.
For example, Rep. Madison Cawthorn (RN.C.) recently filed such reportthough It’s too late, for the purchase and sale of “meme-coin” cryptocurrency. By filing the report, Cawthorn may acknowledge that cryptocurrency is another type of security that must be reported under the STOCK Act.
The Senate Select Committee on Ethics has not yet given a public opinion on the cryptocurrency asset category, although the Senate’s practices appear to be in line with the House. For example, the purchase of Bitcoin by a senator has been reported under the STOCK Act, indicating that Senate Ethics treats all cryptocurrencies as guaranteed transactions.
At least at the congressional level, there appears to be a consensus that cryptocurrencies, even Bitcoin, are a type of security when bought and sold by members of Congress. But does the executive branch agree?
OGE and the Fed
Compared to Congress, the executive branch has taken a more nuanced approach to cryptocurrency taxonomy. Guidelines of the Government Ethics Office in 2018 answered the question of what kind of cryptocurrency assets are in the STOCK Act with a very lawyerly answer — it depends.
The guide states that it is not “clear in the EIGA whether a particular virtual currency may or may not qualify as one of the investment requirements specified in [STOCK Act] to report transactions. The term with the most likely application is ‘another form of security.’ However, when the term ‘securities’ appears in the EIGA, it is not defined there.
In particular, OGE noted that Bitcoin, which “the CFTC has determined to be a commodity,” does not need to be reported. Instead of trying to put all cryptocurrencies into a category, OGE advises employees who may be “unsure whether to hold a particular virtual currency as a security” to report cryptocurrency transactions over $ 1,000.
In February 2022, the Federal Reserve Board declare regulations that prohibit senior officials from owning or trading certain assets, one of which is “cryptocurrency.” Unlike other examples, the Federal Reserve is separate determine cryptocurrency, and perform without classifying it as a security or commodity. “Cryptocurrency” means “a digital asset implemented using cryptographic techniques designed to be used as a medium of exchange.”
As important as the definition is, more critical is what “cryptocurrency” does — it’s not a security or a commodity, both of which are self-defined. Although there is room in the definition for certain digital assets as “cryptocurrency” and “security”, the rules go into effect on July 1, so we’ll see how to deal with these violations.
Where did we go from here?
Those thinking about policies in the digital assets, cryptocurrencies, and web3 industries will be well served to understand the rules that public officials have in place when handling their own digital assets.
RFIA or other bills may create the terms of the debate, but throughout the legislative and regulatory process, government officials will be simultaneously grappling with how to treat cryptocurrencies in their own wallets and will interact with existing ethical rules and interpretations.
This article does not necessarily reflect the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Taxation, or its owners.
William A. Powers is a partner in Nossaman LLP’s office in Washington, DC, where he advises PACs, nonprofits, and companies on compliance with lobbying, ethics, and campaign finance rules. She also helps clients, including those in the technology, crypto, and financial services industries, navigate the rules related to all aspects of engaging government officials and candidates.