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Commentary on the Lummis-Gillibrand Responsible Financial Innovation Act

The crypto community is abuzz with the introduction of the Lummis-Gillibrand Responsible Financial Innovation Act. Although I have yet to see comprehensive analysis - as release occurred just this morning (6/7/22) - I was pleasantly surprised in my own reading by the evenhandedness.

The legislation is largely targeting industry players (brokers, exchanges, stablecoin issuers, etc.) though there are some interesting items for the individual, which will be my primary lens for commentary:

Section 101 Definitions

  • The definition of a "PAYMENT STABLECOIN" (5D) excludes digital assets backed by other digital assets. An asset like the ill-fated UST backed by BTC would not be considered a stablecoin; or a theoretical digital asset backed by multiple stablecoins would not be considered a stablecoin.

Section 201 Gain or loss from disposition of virtual currency

  • The $200 exemption is a nice convenience, many every day items can now be purchased with crypto and no longer require the gain/loss tracking nightmare. Excellent.
  • Reasonable catches for all the would-be cheats - no cash, cash equivalents, commodities, other crypto can be acquired through a disposition. The aggregation rule for those who discover some item not covered specifically in (b)(3) which has theoretically high/efficient fungibility and attempt to structure their transactions under the $200 limit - nope, considered as one disposition.
  • The inflation adjustment (d) is a great addition, in the past laws were written in simple-minded fashion with fixed dollars amounts. For example $200 in the year 2000 lost 40% of its value by 2022.

Section 206 Implementing effective IRS guidance & Section 207 Analysis of retirement investing in digital assets

  • It's going to be a long road to clarity for these topics

Section 208 Digital Asset Mining and Staking

  • This is quite the gift - mining or staking rewards are not taxable until dispositioned. This is going to turn into the 401K of Millennials and Gen Zs.

Section 404 Registration of digital asset exchanges

  • (c)(3) - Curious how they intend to handle perpetual futures which do not meet any definition listed - future delivery, option, or swap. Though functionally I don't believe they have any direct linkage to the underlying.

Section 601 Issuance of payment stablecoins

  • (b) issuers must maintain 100% face amount of liabilities at the Federal Reserve.
  • The "high-quality liquid assets" are truly that - USDT will need to continue cleaning up their act in use of commercial paper of undisclosed quality.
  • Federal Reserve system will facilitate the redemption of stablecoins to the agreed upon currency, instrument, etc.
  • Should the stablecoin issuer go into receivership, stablecoin redemption is as ironclad as you can get. Anyone with a valid claim on a stablecoin issued will have priority over all other claims on the underlying backing assets.
  • Very clearly the intention is to set a rock solid foundation for the digital assets market; should a market panic occur (such as the take down of Terra LUNA/UST) anyone dumping their stablecoins at prices below par may as well be giving their money away as opposed to participating in a potentially insolvent bank run. 

Section 707 Reputation risk; requirements for account termination requests and orders

  • No doubt taking cues from recent events, the bar for forced account termination is set to the highest standard. The increasingly common and corrosive practice of informal governance would be made illegal. 


Still a number of a TBDs to be resolved over the coming years, though pleasantly surprised with the thoughtfulness of the legislation. Congratulations to the bipartisan effort of U.S. Senators Kirsten Gillibrand (D-NY), Cynthia Lummis (R-WY), and their respective staff in pulling this together.

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