Will The 118th Congress Be The Crypto Congress?
Congress is mad about crypto. While some lawmakers are enamored with digital assets, other policymakers from the local to the federal level are – literally – just mad. With the Wall Street Journal recently reporting that public employee pension funds are among those getting hit by the crypto crash, it’s easy to understand the angst of these elected officials. But policymakers also are worried about the tax, environmental, national security, and consumer implications of digital currencies.
As a chart published by Bloomberg Law in May demonstrates, the number of bills introduced in Congress that are related to cryptocurrency has skyrocketed. In 2018, there were only 10 crypto-related bills that had been introduced on Capitol Hill. This year, there have already been more than 20.
And that is just legislation dealing exclusively with cryptocurrency. According to a review by Moody’s Investors Service, since the start of the current Congress, more than 150 pieces of legislation have been introduced that deal in some part with blockchain, decentralized finance, cryptocurrencies, digital or virtual currencies, and other digital assets.
Unfortunately for the sponsors of those bills, with precious few days left in the 117th Congress it is unlikely that any one of these bills will become law. But the next Congress, the 118th, is likely to prioritize crypto-related legislation.
What are the issues, and the specific pieces of legislation, that interested parties should keep their eyes on in the coming years? Let’s take a look.
Who Should Be In Charge Of Digital Asset Regulation?
One of the biggest questions with which Congress is grappling is which federal entity, or entities, should regulate cryptocurrency and other digital assets. At the heart of this issue is defining what, exactly, digital assets are. Are they truly currencies, or are they simply assets individuals invest in to grow their wealth? And because this is Washington, ideology plays a role in this central debate, too. Republicans, who in general have warmer feelings about the positive potential for crypto and digital assets, are loathe to put regulatory control in the hands of the U.S. Securities and Exchange Commission (SEC).
As Politico explained back in March, Democrats are more divided.
Sen. Elizabeth Warren (D-Mass.), a strong crypto critic, wants a robust regulatory framework — possibly involving every agency from the SEC to the Office of the Comptroller of the Currency (OCC) to the Consumer Financial Protection Bureau — while other members of the Democratic caucus prefer a lighter touch. Rep. Ritchie Torres (D-N.Y.) is one policymaker who is skeptical of such a robust regime. He has argued, “The project of radically decentralizing the internet and finance strikes me as a profoundly progressive cause.”
Meanwhile, this past June, Sen. Kirsten Gillibrand (D-N.Y.) and Sen. Cynthia Lummis (R-Wy.) introduced a bill, the Responsible Financial Innovation Act, which would “create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency, and robust consumer protections while integrating digital assets into existing law.” The legislation also deals with the taxation of digital assets. The senators called their bill “the most substantial and comprehensive bipartisan effort to provide certainty and clarity to the growing digital asset and blockchain industries.”
The Gillibrand-Lummis bill assigns regulatory authority over digital asset spot markets to the Commodity Futures Trading Commission (CFTC). Other agencies would be involved in crypto policymaking too, however. The Federal Energy Regulatory Commission, for example, would be required to analyze and report on energy consumption in the digital assets industry while the CFTC, the SEC, the Department of the Treasury, and the National Institute of Standards and Technology would be required to develop comprehensive, principles-based guidance related to cybersecurity for digital asset intermediaries.
Then, earlier this month, Sens. Debbie Stabenow (D-Mich.), Sen. John Boozman (R-Ark.), Sen. Cory Booker (D-N.J.), and Sen. John Thune (R-S.D.) introduced another bipartisan bill, the Digital Commodities Consumer Protection Act of 2022, which would give the CFTC the authority to regulate the trading of digital commodities. The lawmakers said their bill would “hold digital commodity platforms to the same standards as traditional financial institutions” and would “protect consumers and empower them to make more informed trading decisions.”
The Digital Commodities Consumer Protection Act also “recognizes that other financial agencies have a role in regulating digital assets that are not commodities, but function more like securities or forms of payment,” but the bill does not specify what these agencies should do.
There are other digital asset regulatory bills as well. Sen. Pat Toomey (R-Penn.) and Rep. Josh Gottheimer (D-N.J.) each have assembled a draft bill that would put the OCC in charge of regulating stablecoins, for example.
What About Digital Asset Taxation?
Amidst the backdrop of a $30 trillion -- and rising – federal debt, federal lawmakers are keenly interested in the revenue-generating potential of digital assets.
Readers might recall that Congress already has tackled this issue, in part, but it was a very difficult debate. The version of the Infrastructure Investment and Jobs Act (IIJA) signed into law last August contained a provision requiring cryptocurrency trading firms and brokers to report to the federal government additional information about some transactions, including those that are worth are more than $10,000. Lawmakers said this provision would generate an additional $28 billion in tax revenue over 10 years.
Crypto supporters said it would require new surveillance of everyday users of crypto. They tried desperately to get House lawmakers to excise the provision from their version of the IIJA before the legislation was sent to the White House, but ultimately lost.
Republicans are not giving up this fight, however. Right after passage of the IIJA, the top Republican on the House Financial Services Committee, Patrick McHenry (R-N.C.), introduced legislation, the Keep Innovation in America Act, to “fix the digital asset reporting provisions” in the IIJA. Rep. Darren Soto (D-Fla.) also has introduced two pieces of legislation, the Cryptocurrency Tax Clarity Act and the Cryptocurrency Tax Reform Act, that both attempt to address this issue.
There are other matters to consider too.
Sen. Toomey and Sen. Kyrsten Sinema (D-Ariz.) have introduced legislation that would exempt some virtual currency transactions from taxation. As the lawmakers explained, under current law, every time a digital asset is used, a taxable event occurs. Their bill, the Virtual Currency Tax Fairness Act, creates a de minimis exemption for gains of less than $50 on personal transactions and for personal transactions under $50. A companion bill has been introduced in the House by Rep. Suzan DelBene (D-Wash.) and Rep. David Schweikert (R-Ariz.) (As Bloomberg Tax explains, the Gillibrand-Lummis bill includes a de minimis exemption for capital gains of up to $200.)
Meanwhile, Rep. Tom Emmer (R-Minn.) has offered the Safe Harbor For Taxpayers With Forked Assets Act of 2021, which, for income tax purposes, would exclude from gross income any amount received as forked convertible virtual currency. This legislation also would establish a safe harbor period for taxpayers who receive a forked convertible virtual currency. That period would last until the IRS issues regulations or guidance on this matter, or until Congress approves legislation outlining how these assets should be handled.
States Are Taking Digital Asset Action Too
With Congress generally stalled on digital asset legislation, state legislatures are stepping up. As the National Conference of State Legislatures (NCSL) explains, this year alone 37 states have wrangled with legislation concerning cryptocurrency, digital or virtual currencies, and other digital assets. These bills range from Indiana adding a chapter to the Uniform Commercial Code that governs transactions involving controllable electronic records to Washington and West Virginia updating their unclaimed property laws to include virtual currencies to a California bill that, if enacted, would allow public entities in the state to accept virtual currency. Lawmakers in California, Arizona and Wyoming also have offered legislation to allow its citizens to pay their tax bills in cryptocurrencies.
As Global Legal Insights (GLI) has explained, like the legislation that has been introduced in Congress, bills at the state level generally have taken one of two approaches to crypto legislation. States like Wyoming and Colorado have exempted crypto from securities regulation. Meanwhile, jurisdictions like Iowa have taken a more restrictive approach. In contrast to California, lawmakers in that state want to prohibit local and state agencies from accepting digital currency. GLI also notes at least 10 states have issued communications warning consumers about investing in crypto.
In the absence of a federal regulatory and tax framework, states will continue to advance legislation.
But the chances of at least some federal action in the 118th Congress are relatively high. Many of the digital asset bills that have been introduced in Congress are bipartisan. Accordingly, this issue is certainly one where Democrats and Republicans could forge some agreement, regardless of what happens in the midterm elections.