Crypto in Congress

The Year in Review for Digital Asset Regulation

By Joshua D. Franklin, Esq.

Despite all U. S. financial agencies having some level of interest in regulating cryptocurrency, there is currently no federal law passed by Congress that describes the limits of how businesses and private citizens can interact with cryptocurrency, stablecoins or NFTs. With the recent rise of cryptocurrency exchanges and fintech companies, cryptocurrency has now expanded far beyond a technological phenomenon, and morphed into a new asset class known as digital assets. Despite much industry excitement over this new asset class, the lack of a clear regulatory framework leaves a moderate to high risk of financial market manipulation, as well as capricious enforcement by regulators.

In 2022, President Joe Biden issued an Executive Order on Ensuring the Responsible Development of Digital Assets, which provided policy objectives related to supporting innovation, while prioritizing market stability. This article explores some of the most popular and controversial bills regarding digital assets in 2023 and explains key considerations in creating a uniform regulatory framework for digital assets.

What is the SECs Jurisdiction Over Cryptocurrency?

Because of the financial capabilities of digital assets, banking regulators battle the question of whether an agency should have primary jurisdiction over digital assets. Because the Securities and Exchange Commission (SEC) has jurisdiction over all securities and the Commodities Futures Trading Commission (CFTC) has jurisdiction over all commodities, there is a lingering question: Should a digital asset be primarily regulated by one agency?

Currently, the famous Howey test determines whether a particular financial instrument is an investment contract, and thus subject to securities laws. Courts have analyzed this question with respect to individual cryptocurrencies in a number of enforcement actions; however, judges have split opinions on the question, sparking the legal question of whether the Howey test adequately applies to digital assets. To provide some clarity, Congress has introduced a couple of bills, specifically the Financial Innovation and Technology (FIT) for the 21st Century Act of 2023, introduced by Glenn Thompson (R-PA) and Dusty Johnson (R-SD), as well as the bipartisan Responsible Financial Innovation Act of 2023 (commonly known as the Lummis-Gillibrand bill), introduced by Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY). Each bill provides a separate proposal that creates a regulatory framework for particular digital assets and attempts to appropriately limit the jurisdictional scope of the SEC and the CFTC.

The FIT for the 21st Century Act abrogates the Howey tests application to digital assets by codifying a categorization of digital assets based on the blockchain technology of the underlying cryptocurrency. Generally, digital assets issued on centralized blockchains would be classified as securities, and all digital assets on decentralized blockchains would be exempt from securities laws. Although digital asset trading systems, brokers and dealers would also be subject to securities laws, all other digital assets would be classified as digital commodities, and such activity with these assets would be exempt from SEC regulations. The Lummis-Gillibrand bill, however, maintains application of the Howey test, while also providing additional guidance that considers the unique properties of digital assets. With the Lummis-Gillibrand bill, the SEC would have jurisdiction over all assets that meet the Howey test, as well as all NFTs and other non-fungible assets, with some limited exceptions. Meanwhile, all fungible assets and daily cryptocurrency transactions would be subject to the jurisdiction of the CFTC.

So far during this Congressional session, neither bill has been brought for a full vote, but lawyers, judges, and cryptocurrency business executives all agree that new legislation will provide more clarity, save taxpayers from the lingering threat of enforcement action, and strengthen the digital assets industry as a whole.

How Will Regulators Ensure Adequate Cryptocurrency Reporting?

Because cryptocurrency is an international financial tool, the government has indicated compliance with reporting as important for ensuring national security, as well as safe and accurate banking practices. However, because many crypto transactions do not require a bank, or disclosure of any personal information, businesses and regulators both struggle with creating adequate and feasible reporting requirements.

In 1970, Congress passed the Bank Secrecy Act to combat illicit financing of terrorism and mitigate money laundering. However, because the Bank Secrecy Act did not clearly define whether cryptocurrency exchanges and other financial products were subject to the laws reporting requirements, Congress quickly passed the Anti Money Laundering (AML) Act of 2020, which clarified that the Bank Secrecy Act applied to any entity transacting with virtual currency although the law did not define virtual currency. Still, regulators and legal experts question whether the Bank Secrecy Act, as written, is effective, or whether there should be new AML reporting requirements for digital assets.

This year, Congress also introduced a number of bills that would clarify financial reporting requirements for digital assets and provide guidance on the Bank Secrecy Act. The bipartisan Digital Asset AML Act, reintroduced this year by Elizabeth Warren (D-MA), along with Roger Marshall (R-KS), Joe Manchin (D-WV) and Lindsey Graham (R-SC), proposes to subject any cryptocurrency that prevents tracing to the AML provisions of the Bank Secrecy Act. Under this bill, the Bank Secrecy Act would be applied to all wallet providers, blockchain validators, miners, cryptocurrency exchanges and money service businesses, in addition to traditional banks and other financial institutions. The Lummis-Gillibrand bill also addresses the Bank Secrecy Act, albeit moderately, by clarifying that the Bank Secrecy Act and other AML laws also apply to individuals, specifically advisors, consultants or other similar persons.

Although safe banking and financial compliance are some of the most bipartisan issues in Congress, it remains unclear how much oversight financial regulators should have over cryptocurrency transactions, especially when considering Fourth and Fifth amendment implications. The bipartisan Financial Technology Protection Act of 2023, introduced by Ted Budd (R-NC) and Kirsten Gillibrand (D-NY), has received unanimous support of the full House Financial Committee, signaling support for continuous proposals related to digital asset reporting in the future. Now, with the recent criminal conviction of Changpeng Zhao, founder of the worlds largest cryptocurrency exchange, Binance, for violation of the Bank Secrecy Act, clarity to ensure fair and uniform enforcement has become even more important.

Will We Have a Government Issued Cryptocurrency?

In addition to the governments interest in ensuring safe banking for all, America also has an interest in leading technological innovation. With respect to digital assets, one of President Bidens initiatives mentioned in his 2022 Executive Order is an international pledge to continue supporting development and implementation of a Central Bank Digital Currency (CBDC), otherwise known as a digital dollar or government backed stablecoin.

In 2018 and 2019, the United States led the international Financial Action Task Force on developing and adopting international standards on digital assets, and since then, the G7 and G20 countries has developed an international roadmap for creating a CBDC. Today, every country in the G7 and G20, including America, is either piloting, developing or researching a CBDC. America is still in the developmental stages of a CBDC, however, have decided to create a CBDC similar to a stablecoin, a digital asset known to have a redemption value equal to $1. Despite government development, some fintech companies and cryptocurrency businesses have already launched stablecoins, although many attempts have threatened financial stability in both cryptocurrency and traditional markets.

Still, Congress has not shied away from proposing how stablecoins should be regulated in America. In fact, the Clarity for Payment Stablecoins Act of 2023, introduced by Rep. Patrick McHenry (R-NC), proposes that any licensed bank can issue a stablecoin, and creates strict requirements for handling deposits, reserves and liquidity. The Lummis-Gillibrand bill provides a similar framework, although it limits issuance of stablecoin exclusively to traditional depository institutions, rather than other financial institutions like fintech companies and non-depository trusts. The Lummis-Gillibrand bill also provides requirements for reserves and liquidity, however, is more concerned with custody and potential misuse of customer funds, whereas the Clarity for Payment Stablecoins Act is more expansive. Still, neither bill opines on the feasibility of a digital dollar issued by a government agency, although Democrats and Republicans have individually shared their thoughts, signaling bipartisan support for a digital dollar in some capacity.


Although bitcoin and blockchain technology has existed publicly since 2008, Congress is still in the early stages of finalizing any framework for regulating digital assets. Despite much excitement over digital assets and innovation in the banking industry, it is hopeful, but not guaranteed, that the 118th Congress will define digital assets or pass any laws that would provide any additional clarity. In the meantime, Courts, attorneys and legal experts should continue advocating for uniform and adequate regulation that protects investors while also protecting cryptocurrency businesses from unduly burdensome or unconstitutional regulations.

Joshua D. Franklin, Esq. is a litigation attorney specializing in financial technology and digital assets for New York and Minnesota businesses. Mr. Franklin currently advises financial advisors with compliance strategy, as well as defends closely-held businesses and shareholders against a variety of legal matters. Previously, Mr. Franklin was a Litigation Associate at Barnes & Thornburg, LLP serving as counsel in the Aviation, FinTech, and White Collar & Investigations practice groups. 


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