Leaked U.S. Crypto Bill: Thoughts

The following are high level comments concerning the recently released U.S. crypto bill. The information in the version linked below is unverified, and this blogpost will be written with the presumption that the information from the doc linked below is true and accurate. The thoughts and opinions contained in this blogpost do not represent the thoughts and opinions of Residual Token, Inc. dba unFederalReserve, its employees, its agents, its partners nor its affiliates.

The 67-page draft bill can be found here: https://s.wsj.net/public/resources/documents/LummisGillibrandbill.pdf

First off, there is a lot there. The bill does a nice job of classifying the different aspects of the cryptoverse, laying out black and white definitions for DAOs, smart contracts, exchanges, and the like. It appears to call for the adoption of certain disclosure standards by December 31, 2025, but calls for an of IRS provision enactment acceleration on unrealized crypto gains to December 31, 2023. There a couple of other quick-hit dates I touch on through-out, but clearly the goal is to get in front of this thing 3 years too late. As it pertains to taxes, the bill also calls for much greater documentation around nature of the digital asset holding and returns generated, as opposed to just a box somewhere on the form to check on a tax form.

The act calls for the Comptroller by March 2023 to present a study on the health of crypto and retirement accounts. Wow, that would be fast. Good call to require broker-dealer rules for custody of crypto to be finalized. Part of the bill actually goes so far as to call out the due diligence requirements for exchanges insofar as to why it selected the tokens to engage with. That type of information will fall under required disclosures. I’m not sure it would become public knowledge, but it would be interesting to see how a token’s due diligence turned out from multiple exchanges. Not for nothing, most banks and brokerages put out reports on company’s performance all the time, so publishing Kraken’s review of LINK would be little different than reading Fidelity’s report on Coca-Cola.

There’s a section of studying the energy consumption of cryptocurrency. Love that.

And then there’s the regs like this, “IN GENERAL. — Any trading facility that offers or seeks to offer a market in digital assets may register with the Commission as a digital asset exchange by submitting to the Commission an application in such form and o[b]taining such information as the Commission may require for the purpose of making the determinations required for approval under subsections (d) and (f).” And while it says “may” there are other provisions that make the “may” sound like a “must”.

“IN GENERAL. — A digital asset exchange shall — (i) maintain records of all activities relating to the business of the digital asset exchange, including a complete audit trail, [i]n a form and manner acceptable to the Commission for a period of 5 years.” Good luck … it’s all on chain, so possibly doable?? But you’d need a bunch of mapping from the contracts to the identities of the folks and assets a party to the transactions. The very personal information the bill claims to want to keep private will create databases of wallets linked to individuals and companies. The government will be able to monitor individual’s transactions which they may already be doing with credit cards, and such.

“(11) CONFLICTS OF INTEREST. — A digital [a]sset exchange shall — (A) establish and enforce rules to minimize conflicts of interest in the decision-making process of the digital as et exchange.” A lot of exchanges make money by being compensated with the issuer’s token and then being able to front run or market-make whatever vig they got from the issuer. This behavior can change, but the lost revenue will raise the costs charged to retail users.

Interesting see the Graham-Leach-Bliley Act amended to include stablecoin payments.

Here goes permission-less exchanges, “AGREEMENT. — A person who provides digital asset services shall enter into an agreement with a customer, if desired by the customer, regarding the manner in which to invest subsidiary proceeds or other gains attributable to the digital assets of the customer.” The requirement that agreements be made seems kind of open-ended, but when you couple with digital asset exchanges being subject to regular and surprise audits, the result is apparent. If you do business with an American exchange, then you might as well be a bank.

The BlockFi and Nexo Rule: “(2) REHYPOTHECATION. — Before rehypothecating a digital asset, a person who provides digital asset services to a customer shall clearly disclose policies on rehypothecation to customers, including a clear definition of rehypothecation that is accessible to consumers. The person who provides digital asset services to a customer shall obtain affirmative consent and consider the following factors to appropriately mitigate risk relating to rehypothecation”.

No algo stables.

Some anti digital yuan language.

There are also quite a few mentions of investment in blockchain innovation with the intent of improving existing infrastructure. I’m not sure how well the government can execute such a program, but perhaps this loosens the purse strings for grants and RFPs to get the funds into the private sector.

Conclusion

The U.S. Crypto bill, while unverified, does cover a lot of ground in a manner consistent with what we’ve been hearing all along. In essence, the crypto-friendly Senators are calling for disclosure, responsibility and operations analogous to stock houses today. For the most part, any news that reduces uncertainty is good news for the industry. There is also lots of fertile ground for disagreement and potential litigation down the road if this bill gets passed as written.

Opinion Disclaimer. The views and opinions expressed by Howard Krieger are solely his own current opinions regarding the above topic and are based on his own perspective and opinion — it is the opinion and perspective of Howard Krieger. Such views, opinions, and/or perspectives are intended to convey a personal interpretation, and are not intended to malign any individual, religion, ethnic group, or company. These views are his own and not the views of Residual Token, Inc., its agents, nor affiliates.