Sabo - Crypto FI Profile picture
Jul 12 31 tweets 18 min read
The U.S. dropped a massive bill that could change Crypto.

It’s a 68 page report covering stable coins, taxes & the regulation of crypto.

I’ve read it all so that you don’t have to.

Here's everything you need to know in 5 minutes:
In this thread we will cover the:

- Lummis Gillibrand Bill
- Web3 Frameworks
- Chris Dixon's Policy Discussion
- NFT Law

Let's dive in ⬇️
Regulation in Crypto

You need to understand that too much regulation hinders innovation.

But uncertain regulation is equally as bad.

Businesses won't dedicate time, effort and capital into crypto - only for their actions to be declared illegal.
The Problem

The U.S. financial markets are regulated by independent agencies whose jurisdiction overlaps.

This creates confusion and chaos.

Imagine how difficult it must be to enforce laws.

The SEC and the CFTC are the two important ones mentioned in the bill.

Here's why:

They benchmark protocols with "The Howey Test".

The Howey Test determines what qualifies as an "investment contract" and would therefore be subject to U.S. securities laws.

A security being loosely defined as a tradable financial asset.

Examples are stocks and bonds.
Responsible Financial Innovation Act

The Lummis-Gillibrand bill effectively divides the digital asset world into three:

- Commodities
- Securities
- Ancillary assets (crypto tokens with no revenue)

So is the bill actually good for crypto?

Yes, here's why:

Under Section 301 of the bill, issuers of ancillary assets would be required to make certain disclosures to the SEC.

By complying, digital asset issues will be "commodities".

So most of crypto will be regulated by the CFTC

But the SEC has jurisdiction on securities.
Projects that want to tap into the U.S. market will make disclosure about:

- Their businesses
- Financial condition
- Plan for protecting consumers in the event of bankruptcy.

This will reward those with genuine economic utility and honest intentions.
The bill also allows for innovation.

It enable states to establish “financial regulatory sandboxes” within which crypto projects could work, for a maximum of two years, without risk of being shut down by regulators.

Although 2 years may still be too short.

It's still a start.
In a recent AMA, @cdixon, @JakeAuch & @milesjennings shared their thoughts on Web 3 and the bill:

Web 3 is a movement set to unlock immense innovation.

Communities can operate on these networks that have been created by blockchain enabled tokens.

There are many use cases:
@cdixon @JakeAuch @milesjennings Some are digital, some are offline.

Like allowing for creative people like musicians & writers to earn - which is pretty exciting.

Also, removing the need for large intermediaries like Google & Facebook who take the profits.

Web 3 will unlock lots of new business models.
@cdixon @JakeAuch @milesjennings Enforcement Policy

It hasn't worked well so far.

Smart government policy balances innovation and ability to allow start ups to prosper as well as protection for consumers, investors and others.

@JakeAuch had this to say:
@cdixon @JakeAuch @milesjennings Currently there are no real sides being taken - they are "pre partisan" .

That's why it's an opportunity to do real policy work, within the U.S. government.

These are the 3 principles to focus on:
@cdixon @JakeAuch @milesjennings 1/ Strengthening the role of the US dollar

Contrary to the declining dollar myth, the demand for US denominated stables has grown significantly.

People want to store wealth in a digital dollar USD.

Stablecoins could expand the USD - Congress should look further into this.
@cdixon @JakeAuch @milesjennings 2/ Innovation

Entrepeneurs are moving to crypto friendly countries

The U.S. is paradoxically targeting good actors rather than those engaged in bad activity.

The U.S wants the brightest innovation to occur domestically.

So it makes sense for clearer regulation policies:
@cdixon @JakeAuch @milesjennings 3/ Not taking sides

Congress is not meant to have a market opinion.

They are referees ensuring:

- Fair play
- Consumer protection
- Market integrity
- Contract enforcement

Politicians shouldn't be manifesting their own version of what an industry should be:
@cdixon @JakeAuch @milesjennings There are 6 areas where the Lummis-Gillibrand bill becomes useful if it was to pass Congress:
@cdixon @JakeAuch @milesjennings 1/ Terminology Clarity

Terms are getting thrown around.

We're seeing this with the SEC enforcement in the courts now and elsewhere, that don't really have strong grounded definitions.

This bill defines them.

Everything from digital assets to distributed ledger technology.
@cdixon @JakeAuch @milesjennings 2/ SEC vs CTFC

The CFTC will have more authority to regulate and legislate crypto.

Most digital assets are commodities unless proved otherwise.

The task is for the CFTC and SEC to co-operate and form a self regulatory organisation for the industry.
@cdixon @JakeAuch @milesjennings 3/ Stablecoin Policies

The bill strikes a medium between banks as stablecoin issuers and anyone, in general.

Banks and non banks can both issue stables.

Non banks have to work through federal regulators and liquidity requirements.

Algo-stablecoins are outlawed in the bill.
@cdixon @JakeAuch @milesjennings Some stablecoins like USDT have been here for a while.

But, it's a relatively new industry and we need more experimentation.

It may be better to provide a hierarchy of stability of stablecoins, that's both accessible and digestable by consumers.
@cdixon @JakeAuch @milesjennings 4/ Tax Clarity

The bill cleans up tax issues.

If you're using crypto as a medium of exchange and you're exposed to negligible appreciation.

You don't have to pay taxes on this.

It's marks the start of greater tax clarity in the crypto industry.
@cdixon @JakeAuch @milesjennings 5/ State Expectations

It provides more clarity and disclosure for states and consumers:

For state governments - about how they're allowed to regulate crypto.

And for consumers - about what they should expect when they're engaging with crypto issuers or stablecoin issuers.
@cdixon @JakeAuch @milesjennings 6/ DAO's

It makes an initial step towards establishing some legal frameworks for DAO's in the context of the federal tax law.

Initial steps are the foundation we need in this market.

DAO's are still trending.

Better legislation means we could see more people flock to the U.S.
@cdixon @JakeAuch @milesjennings What is missing from the bill?

We need greater disclosure on insurance and rated markets.

And we need NFT legislation.

They will both pose a regulatory problem in the near future:
@cdixon @JakeAuch @milesjennings Some NFT's could be regarded as securities - according to The Howey Test.

Because an NFT can do a lot more than a physical piece of art.

You can imbue it with external value.

We need a framework that aligns the incentive to protect consumers from scams but still deliver value.
@cdixon @JakeAuch @milesjennings Perhaps some good ways to do this would be to integrate better with policy makers.

NFT influencers working to provide a high level education to Congress.

An idea for short term regulation could be SRO's:
@cdixon @JakeAuch @milesjennings SRO's (Self regulatory organisation)

Bring some frameworks to legislate.

Let the community take initiatives on the financial services side of SRO’s.

Create your own apparatus to police bad actors.

SRO's can be beneficial and act as a good buffer for industry regulators.
@cdixon @JakeAuch @milesjennings If you want to watch the full recording of @cdixon Twitter space, (which I highly recommend).

I've linked it below for you:

If you enjoyed this thread, follow me @crypto8fi for weekly threads like this.

And if this advice resonated with you, I'd appreciate if you retweeted it to share with others.

Link here:
Hey, I saw some people complain about the length of this thread.

I completely understand why and I'll make sure to spend more time editing it down further, in the future.

Thanks a lot for the feedback.

And here is a link to the full bill:…

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