Behnam on Future of Crypto Regulation; The SEC's Curious Case; Virtual Currency Tax Fairness Act Introduced
DEF Weekly Roundup - July 27, 2022
CFTC’s Behnam Argues for Legislative Clarity
On Monday, Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam delivered a speech at the Brookings Institution’s webcast on The Future of Crypto Regulation. There were two significant takeaways from Chairman Behnam’s speech.
First, Chairman Behnam announced that the CFTC’s FinTech hub for innovation, “LabCFTC,” will be expanded into an office of its own called the “Office of Technology Innovation.” The Chairman explained that digital assets are no longer a “research project” and most have “outgrown their sandboxes,” implying it is time to begin coordinating and implementing a regulatory response.
Second, Behnam advocated for legislation that would grant the CFTC authority over spot digital asset commodity markets. Several bills in Congress would grant the CFTC this authority, including the Digital Commodity Exchange Act (which was integrated into the comprehensive Lummis-Gillibrand package as well. He also praised policymakers who are actively trying to define the rules of the road through their legislative efforts.
He said that Congressional action laying out the relevant differences between a digital asset commodity and security would help the CFTC and the Securities and Exchange Commission (SEC) in their efforts to regulate the digital asset space, explaining that “in the absence of legislative authority, we at the CFTC continue to look at how we can work to protect markets and investors within the bounds of our existing authority.”
What does this mean?
For now, the jurisdictional ambiguity between the SEC and the CFTC will continue on until legislation is passed that defines their roles clearly. It is encouraging to see the CFTC taking steps to establish its role in regulating the space since, as an agency, it has historically been a market-focused regulator. SEC Chair Gary Gensler has long claimed that, with the exception of Bitcoin, most, if not all, crypto assets are securities and that they need to be registered with the SEC. But the SEC has long been unwilling to actually make registration workable in practice, which has created the unproductive “standoff” we have today.
SEC’s Regulation Via Insider Trading Enforcement
Last week, the SEC filed a complaint against a former Coinbase employee and two other individuals for violating antifraud provisions of the securities laws. The Department of Justice brought a parallel criminal case with wire fraud charges.
According to the complaint, the SEC alleges that the Coinbase employee repeatedly divulged information regarding what tokens would be listed and when they would be listed which resulted in his peers purchasing these assets. Coinbase treated information regarding token listings as confidential and warned employees not to trade or advise anyone to trade on this information.
It is widely known that when Coinbase or any other major exchange lists an asset, it typically appreciates in value in the short term due to increased market access. The purchasers bought nine crypto assets that the SEC classified as securities and sold them shortly after the announcement of their listing for a profit. It is reported that this scheme generated $1.1 million in profit.
What does this mean?
The insider trading allegations themselves don’t have broader implications for the industry, but where the SEC’s and DOJ’s complaints diverge is important from a policy perspective.
The SEC’s complaint claims and briefly argues that nine of the assets involved in the scheme were securities. But because only the individuals involved in the scheme are parties to the complaint, the alleged-issuers of the nine assets and Coinbase cannot defend themselves in court against allegations that they illegally issued securities and are running an unregistered national securities exchange, respectively.
Regardless of what one thinks of the merits of the SEC’s claims on the status of the assets, it’s unconscionable that the SEC is set on circuitously expanding its jurisdictional claims without giving its targets their day in court. It’s further evidence of the need for Congress to intervene as soon as possible.
Senators Toomey and Sinema Propose Crypto Payments Tax Legislation
On Tuesday, Senators Patrick Toomey (R-PA) and Kyrsten Sinema (D-AZ) introduced the Virtual Currency Tax Fairness Act. This bill would exempt transactions resulting in gains of less than $50 from capital gains tax requirements in order to promote the use of digital assets for payments purposes.
This legislation would treat digital assets akin to other currencies (other than the $50 threshold): it’s why you don’t have to calculate your gains and losses when you travel to another country and purchase goods and services in another currency. Currently, IRS policy is that any sale of a digital asset must account for any capital gain or loss on the sale. This standard has long stood in the way of digital assets being utilized as a method of payment for goods or services (and makes filing taxes a pain).
What does this mean?
Jerry Brito from Coin Center commented on the legislation, saying that it “would foster the development of decentralized blockchain infrastructure generally because networks depend on small transaction fees that today saddle users with compliance friction.”
“Retweet!” says anyone who has calculated the gain and loss for gas on every ethereum (or other network) transaction they conducted in a year.