September 2, 2022
We are honored to have the chance to work with Senators Gillibrand, Lummis, and their staff, in helping to shape such an important project.
The United States is proving to be at the forefront when it comes to the regulation of responsible financial innovation, being highly responsive in embracing the need to bring digital assets within the regulatory environment.
The Senate and House of Representatives of the United States of America are likely to approve the 'Lummis-Gillibrand Responsible Financial Innovation Act'. The title of the Act already anticipates the very scope of the measure, which may unlock significant innovation within the US and position it as the world’s most important marketplace for digital assets, with strong backing from the “Bitcoin Senator” Cynthia Lummis (R-WY), as well as another Democratic senator serving as co-lead sponsor, Kristen Gillibrand (D-NY).
The document is very helpful in navigating the world of crypto on a definitional level, as it accurately defines terms that have so far never appeared in other legal provisions in the United States. These include “digital asset” (namely a “natively electronic asset that confers economic, proprietary, or access rights or powers; and is recorded using cryptographically secured distributed ledger technology, or any similar analogue; including virtual currency and ancillary assets, payment stable coins, and any other security or commodity that meets certain requirements”) and “distributed ledger technology” (namely “technology enabling the operation and use of a ledger that is shared across a set of distributed nodes that participate in a network and store a complete or partial replica of the ledger; is synchronized between the nodes; has data appended to the ledger by following the specified consensus mechanism of the ledger; may be accessible to anyone or restricted to a subset of participants; and may require participants to have authorization to perform certain actions or require no authorization”), as well as “smart contract” (i.e. “computer code deployed to a distributed ledger technology network that executes an instruction based on certain conditions; including taking possession or control of a digital asset and transferring the asset or issuing executable instructions for these actions”) and “virtual currency” (i.e. “a digital asset used primarily as a medium of exchange, unit of account and/or store of value; that does not derive value from or is backed by an underlying non-digital financial asset; and does not include a digital asset, accompanied by an issuer’s statement that a denominated or pegged value will be maintained and be available upon redemption from the issuer or other identified person, based solely on a smart contract”). At the same time, the document reaffirms the meaning given to “securities” in Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)), showing that certain elements of the traditional financial world are undoubtedly here to stay.
The document contains, among other things, issues related to responsible taxation of digital assets (Title II, Sections 201–209, with a special reference to decentralized autonomous organizations in Section 204), responsible securities innovation (Title III, Sections 301–304) and responsible commodities innovation (Title IV, Sections 401–410), responsible consumer protection (Title V, Sections 501–506), responsible payments innovation (Title VI, Sections 601–607), and responsible banking innovation (Title VII, Sections 701–708).
In general, Senator Lummis’ goal is to provide clarity to the tech industry and users, particularly guiding them about capital gains related to crypto mining, staking, and spending. In other words, Lumis aims to integrate digital assets into the complex US system of taxation.
As for DAOs, the document affects Section 7701(a) of the Internal Revenue Code of 1986, to which an articulated paragraph is added, and is applicable to taxable years beginning after December 31, 2022.
The fact that the provision is contained in the Internal Revenue Code of 1986 implies that its relevance is fundamentally fiscal, but even on the classification level there are some important specifications as DAOs are framed as business entities:
The term ‘decentralized autonomous organization’ means an organization—
(i) which utilizes smart contracts (as defined in section 9801 of title 31, United States Code) to effectuate collective action for a business, commercial, charitable, or similar entity,
(ii) governance of which is achieved primarily on a distributed basis, and
(iii) which is properly incorporated or organized under the laws of a State or foreign jurisdiction as a decentralized autonomous organization or any similar entity.
The following will not constitute a form of business activity for tax exemption purposes (see section 501(c)(7)): (i) Treasury management, including staking and mining of digital assets;
(ii) Raising funds for a charitable purpose.
(iii) Any other appropriate activity as determined by the Secretary.”
The Project is part of wider work on the part of institutions and policymakers that affects this space more generally. These activities are worth mentioning as we transition to a more mature environment that facilitates greater integration of the work of organizations like KlimaDAO, which are creating legitimate value in critical markets such as the Voluntary Carbon Market. In an articulate speech at the Penn Law Capital Markets Association Annual Conference, SEC Commissioner Gensler reaffirmed how cryptocurrencies are not securities and how "unlike traditional securities exchanges, crypto trading platforms also may act as market makers and thus as principals trading on their own platforms for their own accounts on the other side of their customers".
Other senators, for example Republican Ted Cruz (R-TX), have emphasized Texas' potential to become a key destination for cryptocurrency mining, thanks to the state's plentiful energy sources. Oregon Democratic Senator Ron Wyden, chairman of the Senate Finance Committee, supports cryptocurrency innovation too, and is wary of the impacts that heavy regulation may have on innovation.
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