Progress on Stablecoin Legislation; SEC Update; Block Rewards Litigation Initiated

Progress on Stablecoin Legislation 

What happened?

On October 10th, Senator Bill Hagerty (R-TN) released draft legislation, titled the “Clarity for Payment Stablecoins Act of 2024,” to regulate custodial stablecoins. Senator Hagerty’s proposed legislation focuses on creating standards for stablecoin issuance, reserve management, and regulatory oversight. The act would allow federally qualified non-bank entities and insured depository institutions to issue custodial stablecoins.

Senator Hagerty’s proposed legislation seeks to establish a cooperative regulatory approach between federal and state bodies, emphasizing joint-rulemaking, compliance, and tailored risk management. Under Senator Hagerty’s proposed legislation, payment stablecoin issuers could operate under state regulators if their market capitalization is below $10 billion, with a 360-day transition period to federal regulation if their market capitalization exceeds this threshold.

Additionally, Senator Hagerty proposes requiring stablecoin issuers to maintain reserves on a one-to-one basis with reserves composed of United States currency, demand deposits, or Treasury bills, notes, and bonds. The proposed legislation would also require federal agencies to conduct a study on “endogenously collateralized” stablecoins—i.e., stablecoins backed by other closely-related digital assets.

What does this mean? 

Hagerty’s proposed legislation creates a regulatory framework while still attempting to foster innovation within the stablecoin space. The act’s transparent guidelines around reserve requirements and state-level regulations reflect a thoughtful attempt to protect consumers and support the growth of stablecoins.

SEC Update

What happened? 

Cumberland

On October 10th, the Securities and Exchange Commission (SEC) filed a complaint against Cumberland DRW, alleging that it failed to register as a securities dealer under Section 15(a) of the Securities Exchange Act of 1934. Cumberland is a major participant in the crypto market, conducting over $2 billion in trades since 2018. 

The SEC alleges that Cumberland’s trading of crypto assets, which the SEC considers to be securities, qualifies it as a dealer and requires registration. The SEC is seeking an injunction, disgorgement of proceeds, and civil penalties.

Bitnominal

Also on October 10th, Bitnomial Exchange filed a complaint against the SEC, alleging that it had exceeded its jurisdiction by asserting that Bitnomial must comply with securities regulation for its planned XRP futures contracts, which are already regulated by the Commodity Futures Trading Commission (CFTC). 

In their complaint, Bitnomial explains that complying with SEC requirements, including the need to register as a national securities exchange before listing XRP futures, imposes significant and duplicative regulatory burdens.

What does this mean? 

Both of these events demonstrate the SEC’s continued efforts to claim jurisdiction over but not actually regulate crypto. The SEC’s reliance on nearly century-old securities laws to capture crypto without contemporary legislation creates tremendous legal and regulatory uncertainty for participants in the space. Meanwhile, if Bitnomial’s challenge is successful, it could set a precedent that limits the SEC’s ability to assert jurisdiction over digital assets like XRP when they are traded as futures contracts under the exclusive oversight of the CFTC. This would reinforce the distinction between commodities and securities in the context of digital assets, potentially narrowing the scope of assets classified as securities by the SEC. 

Block Rewards Litigation Initiated 

What happened? 

On October 10th, Josh Jarrett filed a lawsuit in the United States District Court in the Middle District of Tennessee challenging the Internal Revenue Service’s (IRS) taxation of block rewards. Block rewards are new cryptocurrency tokens awarded to validators when mining or validating new blocks to a blockchain through proof-of-work (PoW) or proof-of-stake (PoS). Essentially, the IRS taxes block rewards as “income” the moment they are added to the blockchain. Jarrett argues that this method of taxation is inappropriate because block rewards are new property rather than income and should be taxed when sold. 

What does this mean? 

DEF similarly argued against taxing block rewards until they’re sold in a letter to the Senate in September of 2023. And the bipartisan bill from Representatives Drew Ferguson (R-GA) and Wiley Nickel (D-NC) aims to codify staking rewards as “created property.”