On June 7, United States Senators Cynthia Lummis and Kirsten Gillibrand launched the much anticipated Responsible Financial Innovation Act, proposing a comprehensive set of regulations that address some of the biggest questions facing the digital assets sector. By providing holistic guidance to the rapidly growing industry, the bill offers a bipartisan response to President Biden’s call for a whole-of-government approach to regulating crypto.
Among its many proposals, the bill establishes basic definitions, provides an exemption for digital currency transactions and harmonizes the roles of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), delineating regulatory swim lanes and granting a significant jurisdictional expansion to the CFTC.
The bill is perhaps most productively seen as an invitation for further dialogue. In the coming months, its success or failure will largely be determined by the strength of the debates it generates. It has already engendered strong reactions from the industry. One of the most hotly debated — and potentially impactful — sections of the legislation pertains to decentralized autonomous organizations (DAOs). While the act helpfully clarifies elements of DAO policy, further action is required to answer the remaining questions around legal status, applicable laws and jurisdictional authority.
Related: Powers On… Summer musings after two particularly bad months in cryptoland
What are DAOs and why is this regulation important?
DAOs are bodies that use blockchains, digital assets and associated technologies to collaboratively allocate resources, manage activities and make decisions. By making operational and financial information publicly viewable and empowering members to suggest, vote on and directly ratify changes to organizations, DAOs offer a way to decentralize the operation of firms. The pioneering Responsible Financial Innovation Act would address basic questions of DAO policy including defining DAOs, establishing incentives for incorporation and bringing them into the tax code.
In recent years, DAOs have experienced radical growth. According to the data analytics site DeepDAO, in 2021 alone, the total value of DAO treasuries skyrocketed fortyfold, from $400 million to $16 billion, and the number of participants surged 130x from 13,000 to 1.6 million. DAOs today are being developed to achieve a diversity of aims including governing financial services, facilitating…
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