The Responsible Financial Innovation Act introduced on Jun 7, 2022 includes a comprehensive regulatory framework for digital assets and seeks to provide clarity in how digital assets, such as cryptocurrencies, are treated under US securities law. The lynchpin of the bill is the codification of the US Supreme Court’s decades-old standard for determining when a financial offering is a “security,” i.e., the Howey test.
If cryptocurrency is a “security,” then crypto-companies issuing them must comply with Securities and Exchange Commission rules for registration and reporting—failure to do so can lead to significant penalties, such as the $100 million SEC fine. issued by the SEC in 2021.
However, many in the industry believe that cryptocurrencies act more like commodities than securities and would prefer them to be treated as such, subject to the Commodity Futures Trading Commission’s rules. The “security” vs. “commodity” debate has many practical implications for the cryptocurrency industry, as well as consumers, and is already heating up in Washington.
But the RFIA, introduced June 7 by Sens. Cynthia Lummis (R-Wy.) and Kirsten Gillibrand (D-N.Y.), is not the first time the federal government has tried to classify cryptocurrency. In fact, the ethics bodies that interpret the very rules that govern a federal official’s personal financial dealings—the Ethics in Government Act and the Stop Trading on Congressional Knowledge Act (STOCK Act)—have already weighed in on the “security” vs. “commodity” debate.
Advocates and attorneys parsing the RFIA will also want to understand the contours of these ethics laws before they step into the fray because these rules are the ones that govern a federal official’s own wallet.
Congress and the STOCK Act
The STOCK Act requires members of Congress and certain staff to report transactions related to specified assets within 45 days. Specifically, transactions over $1,000 for “stocks, bonds, commodities futures, and other forms of securities” must be publicly reported.
Both House and Senate guidance explicitly consider cryptocurrencies as covered, however, only the House guidance identifies the category under which cryptocurrencies fall: “other forms of security.” Although the House guidance is limited in applicability to U.S. representatives and certain House staff, high-profile examples where members of Congress have reported cryptocurrency transactions (or failed to) may be creating new norms.
For example, Rep. Madison Cawthorn (R-N.C.) recently filed such a report, albeit late, for purchases and sales of a “meme-coin” cryptocurrency. By filing the reports, Cawthorn presumably concedes that the cryptocurrency is a type of other security required to be reported under the STOCK Act.
The Senate Select Committee on Ethics has not publicly opined about what category of asset cryptocurrency falls under, although the Senate’s practice appears to align with that of the House. For example, the purchase of Bitcoin by a senator has been reported under the STOCK Act, indicating that Senate Ethics treats all cryptocurrencies as covered transactions.
At least at the congressional level, there appears to be consensus that cryptocurrencies, even Bitcoin, are a type of security when they are bought and sold by a member of Congress. But does the executive branch agree?
OGE and the Fed
Compared to Congress, the executive branch has taken a more nuanced approach to the taxonomy of cryptocurrency. Guidance from the Office of Government Ethics in 2018 answered the question of what type of asset cryptocurrency is under the STOCK Act with a very lawyerly answer—it depends.
The guidance stated that it is not “clear under the EIGA whether particular virtual currencies may or may not qualify as one of the investment terms specified in the [STOCK Act] for transaction reporting. The term with the most likely application is ‘other forms of securities.’ However, while the term ‘securities’ appears in the EIGA, it is not therein defined.”
Notably, the OGE stated that Bitcoin, which “the CFTC has determined it to be a commodity,” need not be reported. Rather than attempting to fit all cryptocurrencies into a category, the OGE advises employees who may be “uncertain whether a particular virtual currency holding is a security” to report cryptocurrency transactions of more than $1,000.
In February 2022, the Federal Reserve Board announced regulations that ban senior officials from owning or trading certain assets, one of which is “cryptocurrency.” Unlike the other examples, the Federal Reserve separately defines cryptocurrency, and does so without categorizing it as a security or commodity. “Cryptocurrency” means “a digital asset implemented using cryptographic techniques designed to work as a medium of exchange.”
As important as that definition is, more critical is what “cryptocurrency” is not—it is neither a security nor a commodity, both of which are separately defined. Although there is room under those definitions for certain digital assets be both a “cryptocurrency” and a “security,” these rules went into effect July 1, so we will see how they are honored in the breach.
Where Do We Go From Here?
Those thinking about policy in the digital asset, cryptocurrency, and web3 industries would be well served to understand the rules that public officials already are subject to when handling digital assets of their own.
The RFIA or other bills may frame the terms of debate, but throughout the legislative and regulatory processes, government officials will simultaneously be grappling with how to treat cryptocurrencies in their own wallets and will be interacting with these ethics rules and interpretations already in place.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
William A. Powers is a partner in Nossaman LLP’s Washington, D.C., office, where he advises PACs, nonprofits, and companies on compliance with lobbying, ethics, and campaign finance rules. He also helps his clients, including those in the tech, crypto, and financial services industries, navigate the rules related to all aspects of engaging with government officials and candidates.