Is crypto a value or a commodity? Look at the ethical rules of Congress

The Responsible Financial Innovation Act introduced on June 7, 2022 includes a comprehensive set of digital assets and seeks to clarify how digital assets, such as cryptocurrencies, are treated under US securities law. The basis of the bill is the codification of the US Supreme Court’s decades-old standard for determining when a financial offer is a “security”, ie. Howey testimated

If cryptocurrency is a “security”, crypto companies issuing it must comply with the Securities and Exchange Commission’s registration and reporting rules – failure to do so could result in significant penalties, such as $ 100 million in SEC fines. issued by the SEC in 2021.

However, many in the industry believe that cryptocurrencies act more as commodities than securities and prefer that they be treated as such, subject to the rules of the Commodity Futures Trading Commission. The debate about “security” vs. “Commodity” has many practical implications for the cryptocurrency industry, as well as consumers, and is already heating up in Washington.

But RFIA, introduced June 7 by Sens. Cynthia Lummis (R-Wy.) And Kirsten Gillibrand (DN.Y.), are not the first time the federal government has tried to classify cryptocurrencies. In fact, the ethical bodies that interpret the very rules that govern a federal official’s personal financial affairs – the Ethics in Government Act and the Stop Trading on Congressional Knowledge Act (STOCK Act) – have already weighed in on “security” versus “commodity” debate.

Lawyers and attorneys who analyze RFIA will also want to understand the contours of these ethical laws before entering the fight because these rules are what govern a federal official’s own wallet.

Congress and the Companies Act

The Companies Act requires members of Congress and certain employees to report transactions related to specified assets within 45 days. In particular, transactions over $ 1,000 for “stocks, bonds, commodities futures and other forms of securities” must be reported publicly.

Both the House and Senate guidelines explicitly consider cryptocurrencies to be covered, but only the House guidelines identify the category that cryptocurrencies fall into: “other forms of security.” Although the House’s guidance is limited in terms of applicability to U.S. representatives and some House staff, high-profile examples where members of Congress have reported cryptocurrency transactions (or have failed to do so) can create new standards.

For example, rep. Madison Cawthorn (RN.C.) recently filed such a report, albeit too late, for the purchase and sale of a “meme-coin” cryptocurrency. By submitting the reports, Cawthorn probably admits that the cryptocurrency is a type of other security that must be reported in accordance with the Companies Act.

The Senate’s Select Ethics Committee has not made a public statement on which category of active cryptocurrencies falls into, although the Senate’s practice appears to be in line with that of the House. For example, the purchase of Bitcoin by a senator has been reported under the Companies Act, indicating that the Senate’s ethics treats all cryptocurrencies as covered transactions.

At least at the congressional level, there seems to be agreement that cryptocurrencies, even Bitcoin, are a type of security when bought and sold by a member of Congress. But does the executive agree?

OGE and 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 Companies Act with a very legal answer – it depends.

The guidance stated that it is not “clear under EIGA whether certain virtual currencies may or may not qualify as one of the investment terms specified in [STOCK Act] for transaction reporting. The term with the most likely use is “other types of securities.” However, although the term “securities” appears in EIGA, it is not defined there. “

In particular, OGE stated that Bitcoin, which “the CFTC has determined to be a commodity,” does not need to be reported. Instead of trying to fit all cryptocurrencies into a category, OGE advises employees who may be “unsure whether a particular virtual currency is a security” to report cryptocurrency transactions of more than $ 1,000.

In February 2022, the Federal Reserve Board promulgated regulations prohibiting senior officials from owning or trading certain assets, one of which is “cryptocurrency.” Unlike the other examples, the Federal Reserve defines cryptocurrency separately, and does so without categorizing it as a value or commodity. “Cryptocurrency” means “a digital asset implemented using cryptographic techniques designed to act as an exchange medium.”

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 defined separately. Although there is room under these definitions that certain digital assets are both a “cryptocurrency” and a “security”, these rules came into force on July 1, so we will see how they are respected in the breach.

Where do we go from here?

Those who think about policies in the industry for digital assets, cryptocurrency and web3, will benefit from understanding the rules that public officials are already subject to when handling their own digital assets.

RFIA or other bills may affect the conditions for debate, but throughout the legislative and regulatory processes, government officials will simultaneously struggle with how to deal with cryptocurrencies in their own wallets and will interact with these ethical rules and interpretations that are already in place.

This article does not necessarily reflect the intent of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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William A. Powers is a partner in Nossaman LLP’s office in Washington, DC, where he advises PACs, non-profit organizations and companies on lobbying, ethics and campaign financing. He also helps his clients, including those in the technology, crypto and finance industries, to navigate the rules related to all aspects by engaging with government officials and candidates.