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Important Nuances in the Lummis‐Gillibrand Crypto Bill: Not Securities?
Cato | Jack Solowey | Jun 10, 2022
On June 7, 2022, senators Cynthia Lummis (R‑WY) and Kirsten Gillibrand (D‑NY) unveiled their highly anticipated crypto bill. The bipartisan Lummis‐Gillibrand Responsible Financial Innovation Act covers some of the most contested issues in crypto regulation, including taxation, stablecoins, digital asset exchanges, interoperability with the banking system, and compliance with anti‐money laundering laws and sanctions.
Notably, the bill seeks to clarify the extent to which digital assets ought to be regulated as securities by the Securities and Exchange Commission (SEC) or commodities by the Commodity Futures Trading Commission (CFTC). Some reactions to the bill have couched the Lummis‐Gillibrand solution as handing the reins to the CFTC.
See: The Lummis-Gillibrand Bill Puts the CFTC in Charge: A Win for the Crypto Industry
However, this characterization glosses over key features of the bill, under which commodities or securities regulations may apply to crypto projects, depending on the circumstances. The question that the Lummis‐Gillibrand bill seeks to answer is less “whether” it is the SEC or the CFTC that has a role to play in crypto regulation so much as “when” each agency does.
Under the bill, while a digital asset itself may be a CFTC‐regulated commodity, where that asset is sold in connection with a type of security known as an “investment contract,” the contract still will be considered an SEC‐regulated security.
The SEC has found investment contracts to exist when, for example, crypto tokens are sold during so‐called initial coin offerings (ICOs), which raise money for early‐stage crypto projects. The Lummis‐Gillibrand bill recognizes that digital assets will continue to be sold like this. Therefore, the bill introduces the concept of an “ancillary asset.”
See: Alleged US$16 million crypto theft case to test ‘Code is law’ defence in Canada
Under this framework, where a crypto token is, for instance, sold alongside an investment‐like opportunity that helps to finance a crypto project, the token itself may be presumed to be a commodity while the contract documenting the investment remains a security. In such cases, the bill would require the token seller to make applicable disclosures to the SEC.
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