The Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) sets the stage for US regulation of cryptocurrency and therefore plays an essential role in the development of crypto innovation. The crypto market is expected to grow from $1.6B in 2021 to $2.2B by 2026 and the US will play a big role in that growth. Many are reporting that the savviest of investors welcome regulation, but my fear is that bad regulation will be equated with good regulation without much qualitative assessment between the two.

After researching how the Lummis-Gillibrand bill positions “digital assets” and other crypto-specific terms, I have concluded that the categories they use to describe digital assets are antiquated and need to be reconceptualized. The legislative positioning is also concerning given that the chapter used to define crypto terms (digital assets, et al) implies executive branch legislative authority. In what follows, I briefly describe how the bill defines the terms structurally, which provides context to legislative authority. The subsequent section, Nationalism and Title 31, shows how and why this context uses foreign and domestic categories in Money and Finance. My argument is that crypto is a natively “a-national” asset, which supersedes any national sovereignties. The Executive Branch and Title 31 section argues that the executive oversight for regulation would be costly and haphazard to do independently of the industry. Additionally, regulating digital assets could be unethical in some cases. My suggestions would be to clarify how the CFTC, the executive branch, and the Fed will act in consort to regulate the industry. Decentralized technology is philosophically transparent therefore buy-in will require maximum transparency from US regulators.

My hope is that this can be a space where supporters of both decentralization and regulation can come together and find some compromise.

Money and Finance

The Financial Innovation Act defines cryptocurrency as digital assets in chapter 98 of title 31. Before getting into how the bill defines crypto, I am interested in critically examining the context of digital assets as they are newly defined in title 31.

United States Code (U.S.C.) 31, titled, “Money and Finance,” broadly describes the scope, function, and organization of the United States Treasury, one of 15 departments in the executive branch. 31 U.S.C., is the initial organization of legislation, which will be added to the Code of Federal Regulations (C.F.R.) 31. These two documents should be fairly consistent, except where executive branch agencies need to enact laws. In this case, the CFR will differ from the U.S.C.

Within 31 U.S.C., there are chapters that are relevant to cryptocurrency such as chapter 53. This chapter deals with credit and monetary expansion (as directed either by the Sec. of Treasury or the President in conjunction with the Federal Reserve Banks and the Board of Governors), as well as reporting monetary transactions. This empowers the executive branch along with the Fed to stabilize the dollar against volatility while also granting money laundering regulatory power to the Treasury.

There are two problems with framing the definition of “digital asset” inside 31 U.S.C. First, that code uses a nationalistic lens to classify digital assets in order to protect the economic sovereignty of the United States. I argue that cryptocurrency is fundamentally an “a-nationalistic” digital asset.

Nationalism and Title 31

Title 31 views digital assets through a nationalist lens. Take sections 5313 and 5314 as an example. The former requires “domestic financial institutions” to report on transacting parties while the latter requires US residents and citizens to report on transactions with any “foreign financial agency.” Both types of institutions are defined in section 5312, by whether an institution is inside or outside the United States.

The problem with this lens is that cryptocurrency and crypto markets cannot be defined geographically. What matters more than the thoughtlessness of prescribing cryptocurrency as a “foreign financial” digital asset, is that cryptocurrency actually confers a new type of sovereignty that is anti-nationalistic — “a-nationalistic.” This has been articulated in Balaji Srinivasan’s Network State.

A cryptocurrency is the result of several nodes in a network coming to a consensus and solving a cryptographic problem. Participants in this network could be located in Iran, Russia, Turkey, and other places that are less than friendly to American politics. One could rightly argue that these computers are using vital national energy resources across several nations. I would argue that they could use any nation’s energy resources in consort because nations are not programmed into any blockchain network (at least that I’m aware of).

Cryptocurrency is not a foreign or domestic asset. It is an a-national digital asset.

The question that really needs to be debated is, where in a chain of transactions does the sovereignty of the dollar begin? As an avid DeFi investor, I agree that when I import my dollars from my bank account to a centralized exchange (Coinbase, Kucoin, etc.) my dollars are subject to US financial authority and regulation — because after all, they are dollars. The grey areas are what happens when dollars get exchanged for ETH, BTC, SOL, etc? Does exchanging them into cryptocurrencies of any sort at that point make the digital assets a-national? Is there a fundamental difference between stable coin exchange and altcoin exchange? These would be excellent questions to debate.

Once cryptocurrencies leave a centralized exchange they definitely become a-national. DeFi is the wild west, which is what most DeFi advocates love about it. Liquidity pools, yield farming, staking, arbitrage — these are the mechanisms of “the peoples’ bank” that is DeFi. It would be extremely difficult and costly for the CFTC to regulate every DEX, dApp, lending pool, etc. Not to mention there are certain ethical implications for doing so such as what constitutes censorship in DeFi regulation? More on this point below.

If a DeFi investor wants to convert their earnings back into fiat they have to do so on a centralized exchange. This again raises the issue of where in the transaction chain cryptocurrencies become fundamentally national. Additionally, there are risks for the exchange such as having enough dollars to back the stable coins coming from DeFi. Do US regulators have an obligation to protect investors on a centralized exchange in the event it becomes insolvent? Are there certain exchanges where US regulators do not have such an obligation?

To say that all digital assets can be viewed as national or foreign is patently false. While I admit there is some grey area as to when a dollar becomes a digital asset, DeFi and value exchange that happens off of centralized exchanges are categorically a-national.

The Executive Branch and Title 31

While it has been widely reported and confirmed that the Commodity Futures Trading Commission (CFTC) will regulate crypto, the executive branch’s regulatory role remains unclear. Even though the commissions of both the SEC and the CFTC are appointed by the President, the executive branch’s regulatory role as far as oversight and decision-making with these two independent agencies is unclear. No doubt a President’s involvement in US Treasury oversight will vary from one executive team to another — and this is exactly what concerns me.

Cryptocurrency is built on blockchain technology or distributed ledger technology (DLT), which is first and foremost a technological innovation. Before settlement can take place on any exchange, centralized or decentralized, a layer 1 blockchain needs to be coded and networked. Applications built on top of that layer 1 need to be able to take signed transactions between two or more digital wallets. Sometimes that signature is financial — an agreement between two or more parties on the exchange of digital assets. But sometimes it is not financial such as when an exchange asks permission to view coins in your non-custodial wallet. To say that crypto is fundamentally financial mischaracterizes its true value. While DLTs and crypto are different concepts you cannot have one without the other — they are components of one another.

This is important because doing many things on a blockchain requires the exchange of native crypto assets. These could be harmless like acquiring vehicles, weapons, or skins in play-to-earn gaming. Enabling that exchange at a reasonable value requires trust in the DLT, which in turn shows that despite the fact that web 3 participants often don’t know with whom they’re transacting they still maintain trust. This is not to say that there aren’t a boat load of scammers and bots, but understanding how to spot them is quickly becoming a regulatory regime of native web 3 communities. Not to mention, scams and bots aren’t native to crypto and web 3. Both DLTs and crypto assets are components of the same thing. If this is the case, how does a financial institution regulate a decentralized computer network?

Cryptocurrency and web 3 are complicated technologies. If anyone tells you that they are experts in crypto be skeptical of everything they tell you. This area is evolving at lightning speed and as such there are tons of whitepapers, demos, and developer docs that are launching every day. In order to regulate crypto, there needs to be a team of highly skilled experts who not only understand and keep pace with crypto innovation but also have the ability to explain it simply for regulatory purposes. Why? Because politicians are lawyers by training who become indoctrinated in the legislative process. They know little about technology, cryptography, or computer science (and rightfully so). In other words, regulatory legislation will need to gain buy-in from crypto experts in the industry, many of whom will want more transparency on the executive branch’s role in the regulatory process.

The executive branch would have to expand its scope of expertise in order to regulate cryptocurrency and this would be difficult for several reasons. First, they would have to offer competitive salaries to advisors and that may be difficult to do given the range of web 3 salaries. Second, the executive branch would need to provide a framework for advisory roles that accommodate continuous engagement with innovation in the web 3 space. Third, the executive branch would need to ensure that legislative objectives do not impede tech and fintech innovation. Doing so would require a creative solution to the bipartisan (or realistically, partisan) regulatory legislative process.

Finally, the ethical implications of executive oversight, even if they are titular, are also questionable in some instances. As discussed above, which part of the transaction chain is sovereign US financial “territory” is the real debate here. Requiring all projects in web 3 that transact with any cryptocurrency or crypto-stablecoin pairs to be subject to US regulation would be an imposition of personal freedom to exchange value in a trans-human manner. For the US to act upon this proposition (and the executive branch in particular) could undermine its authority worldwide and ultimately reduce reciprocity with its citizens.

Conclusion and Suggestions

This article discussed how 31 U.S.C. imputes executive-legislative power over digital assets and doing so with traditional legislative processes could stifle innovation and could be unethical. I also noted that digital assets, specifically crypto, are a-national in nature. Noting this allowed me to suggest that the real debate in regulating digital assets ought to be the points in a transaction that are national fiat versus those that are purely “digital assets” as such.