US’ Key June Crypto Regulatory Moves

Coinfirm’s Regulatory Affairs summarises the key US crypto regulatory moves that happened in June, including the:

• Lummis-Gillibrand Responsible Financial Innovation Act
• Federal Trade Commission Report on Crypto Scams 
• NYS DFS Guidance on the Issuance of U.S. Dollar-Backed Stablecoins

Lummis-Gillibrand Responsible Financial Innovation Act

On June 7, 2022, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) announced the introduction of the bipartisan Lummis-Gillibrand Responsible Financial Innovation Act. 

The Act addresses a wide range of crypto assets regulation subjects across taxation, securities, banking, and consumer protection referencing and expanding a number of existing regulations within these areas. 

Apart from the official summary and key points of the Act outlined here, there are a number of comprehensive summaries published, some of which also go into detail of explaining the wider background (especially in cases where the Bill amends existing regulatory instruments). An example of a comprehensive summary is the one published by FS Vector. 

Among multiple areas that the Bill addresses, the most notable and impactful appear to be: 

–  Definitions:  The Act provides definitions of key terms in crypto assets 

–  Taxation: The definition of ‘broker’ included in the Infrastructure Bill (imposing reporting and taxation requirements) will be amended to clarify further its scope. Also, the Act introduces a tax exemption on gain or loss from the change of value in virtual currency used for personal transactions under $200

– Security or commodity: The Act attempts at making a clear distinction on when digital assets are governed by securities laws and when they qualify as commodities 

– CFTC as a regulator for digital asset spot market: The Act gives the authority to the CFTC to regulate the digital asset spot market for assets that are considered commodities, including the supervision of digital asset exchanges that will need to register with CTFC 

– Consumer protection: financial institutions that offer digital asset products will be required to clearly identify and disclose the risks of engaging in digital asset transactions to the consumers, in some cases with consumer affirmative consent required 

– Stablecoins: depository institutions intending to issue stablecoins will need to apply 

to the state or federal banking agency at least six months prior to issuance of the payment stablecoin. One of the requirements for issuance will be proving that the stablecoin is backed 100% and that the applicant has a recovery plan in the event of a redemption of all outstanding claims. Depository institutions that issue payment stablecoins would be required to publicly disclose a summary of the assets backing their payment stablecoins. Additionally, the Act mandates OFAC to issue guidance associated with sanctions compliance for stablecoins 

Federal Trade Commission Report on Crypto Scams 

The Federal Trade Commission has issued a report on crypto-asset scams to better look into consumer protection and quantify the volumes and methodologies that scammers use to part crypto from victims.

• Since the start of 2021, more than 46,000 people have reported losing over $1 billion in crypto to scams
• Median individual reported loss -$2,600
• The top cryptocurrencies people said they used to pay scammers were Bitcoin (70%), Tether (10%), and Ether (9%)
• Nearly half the people who reported losing crypto to a scam since 2021 said it started with an ad, post, or message on a social media platform
• The top platforms identified in these reports were Instagram (32%), Facebook (26%), WhatsApp (9%), and Telegram (7%)
• Types of scams most common by the value of fraud losses: 
  • Investment scams ($575 million)
  • Romance scams ($185 million)
  • Business and government impersonation scams ($133 million)

NYS DFS Guidance on the Issuance of U.S. Dollar-Backed Stablecoins

On June 8th, the New York State Department of Financial Services issued a guidance for U.S. Dollar-backed stablecoins, joining a number of financial regulatory bodies to take aim at the stablecoin sector in the wake of the Luna/Terra collapse.

Read: Regulatory Response to Stablecoins and the Terra Collapse

The purpose of this guidance is to emphasise:

• Redeemability
• Assets reserve and 
• Attestations requirements 

that will generally apply to stablecoins backed by the U.S. dollar that are issued under DFS oversight. 

The Guidance notes that the above 3 requirements are not the only requirements DFS places or may place on the issuance of stablecoins. Other risks that DFS typically looks at before authorising issuance of stablecoins are:

• Risks relating to cybersecurity and information technology 
• Network design and technology considerations 
• BSA/ AML and sanctions compliance 
• Consumer protection 
• Safety and soundness of the issuing entity 
• Stability/integrity of the payment system