In the early days of crypto, it was dismissed as a fad and will eventually cease to exist. However, more than a decade has passed, and it has grown to a Three Trillion Dollar Industry at its peak. The popularity caught the attention of financial regulators and subjected digital assets to stricter scrutiny. But in the absence of regulatory clarity, US government agencies have resorted to regulation by enforcement, which involves prosecuting crypto entities without giving out clear guidance. This has affected the growth of cryptocurrencies in the US and undermines the country’s lead in innovative technology. The Lummis-Gillibrand Responsible Financial Innovation Act of 2023 aims to fix this.
Senator Cynthia Lummis and Senator Kirsten Gillibrand have been working on the bill since last year. The 2023 version adds stronger consumer protection and safeguards to fight against bad actors without curtailing American innovation. The bill recognizes that there will always be bad actors, but preventing fraud should not interfere with the growth of an innovative industry.
What is New in the Updated Crypto Bill?
A lot of investors lost money in 2022 due to the implosions of several crypto companies. The most infamous is the collapse of FTX, a crypto exchange that allegedly misused customer funds. Hard lessons were learned, and US lawmakers are now trying to craft regulations to prevent this from happening again.
Some of the salient points of the updated bill are:
- All crypto exchanges are required to register with the Commodity Futures Trading Commission (CFTC), except for decentralized protocols.
- The bill requires all payment stablecoins to be issued by a bank or credit union.
- Algorithmic stablecoins are classified as hybrid instruments and will be placed under the CFTC’s jurisdiction.
- Crypto companies will have mandatory proof-of-reserves.
- Customer agreement must be in plain language
- There is mandatory asset segregation and mandatory third-party custodian. This protects customer assets from comingling and from fraud.
- The bill bans rehypothecation – or the use of collateralized assets for the exchange or company’s purpose.
- The bill also has a section to combat Illicit finance, which includes how crypto ATMs must maintain accurate addresses with the Financial Crimes Enforcement Network (FinCEN). It also tasks the CFTC and the SEC to adopt standards to prevent money laundering.
For a more detailed overview, click here.
It is All About Protecting Consumers and Innovations
The US has been known to be a leader in innovation. The Wright brothers, American inventors, gave us the airplane. The US introduced ARPANET, which was the precursor of the internet. IBM, Microsoft, Apple, and Intel started in the US. The world looks up to the US for technological advancements, and blockchain technology is the next innovation. However, due to a lack of legal framework, it has been subjected to hostile treatment by regulators. Hopefully, the Lummis-Gillibrand Responsible Financial Innovation Act will fix this. Other countries are already embracing crypto, and if the US does not change course, then it might lose its status as a leader in innovation and finance.
