Last week, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) made a joint appearance on CNBC to discuss their bipartisan bill regulating the cryptocurrency industry. Host Andrew Ross Sorkin asked the Senators if they thought it was a good idea to allow people to invest their 401(k) retirement accounts in Bitcoin. 

"I think it's a wonderful idea," Lummis replied. "You want some assets [in a retirement account] that are just a store of value, and I think that's where bitcoin really shines." 

"I agree," Gillibrand added. According to Gillibrand, the legislation she is introducing with Lummis will create imbue crypto with "safety and soundness" and give investors confidence that crypto is "here to stay." 

Squawk Box @SquawkCNBC

Should #Bitcoin be able to be used in your retirement fund? @andrewrsorkin asks @SenLummis and @SenGillibrand:

June 7th 2022

87 Retweets340 Likes

Sorkin asked the question because Fidelity, the largest provider of 401(k) plans in the United States, announced in April that "it would enable its participants to put a slice of their retirement money into Bitcoin — if their employers are willing to allow it." The move could greatly expand the market for cryptocurrencies by allowing "direct investment in Bitcoin… without having to set up an account on a cryptocurrency exchange." Fidelity would allow employers to authorize up to 20% of 401(k) contributions to be invested in Bitcoin.

The Labor Department, however, which oversees employers that offer 401(k) plans, says it has "grave concerns with what Fidelity has done." The Labor Department says, that While 401(k) accounts are supposed to provide retirement security, cryptocurrency is a "speculative and volatile investment." In the last 6 months, for example, Bitcoin has plummeted 43%. The Labor Department notes that "extreme volatility can have a devastating impact on participants, especially those approaching retirement and those with substantial allocations to cryptocurrency." Employers that authorize investments in cryptocurrency could be violating their fiduciary duty "to identify and avoid imprudent investment options."

In the CNBC interview, Lummis and Gillibrand rejected the Labor Department's guidance but failed to disclose their financial ties to the crypto industry. Lummis purchased between $50,000 and $100,000 in Bitcoin on August 17, 2021. At the time of her purchase, a Bitcoin was worth $44,671. Today, a Bitcoin is worth $27,978.70. If a portion of the $11 trillion invested in 401(k) accounts were diverted into Bitcoin, it could significantly drive up the price. Lummis previously said that she has been investing in Bitcoin since 2013 and her current holdings are valued between $150,000 and $350,000. 

Gillibrand does not report any crypto assets. But Kristin Smith, executive director of the Blockchain Association, the lobbying organization for the crypto industry, reportedly hosted a fundraiser for Gillibrand in Manhattan on May 31. The fundraiser occurred just a week before Gillibrand and Lummis introduced legislation regulating the industry. 

The legislation is consistent with the work of two Senators seeking to ingratiate themselves with the crypto industry. 

Of, by, and for the crypto industry

Minutes after Gillibrand and Lummis introduced the bill, it was lavished with praise by the Blockchain Association. Jake Chervinsky, Head of Policy for the Blockchain Association, tweeted that there is "a lot to like" in the bill and the industry was "lucky to have great allies in Senators Lummis & Gillibrand." Chervinsky revealed that the Blockchain Association had been "working with both offices to make this bill the best it can be."

Why is the crypto industry so enthusiastic about this bill? First, it needs a regulatory framework around crypto so that more people feel comfortable investing and using crypto. More investors mean higher prices and bigger profits. Regulation is also seen as inevitable, so establishing a framework reduces uncertainty and makes crypto a more attractive asset. 

At the same time, the industry doesn't want to give up the freedom of operating as an effectively unregulated industry. Gillibrand and Lummis' bill threads the needle, giving the crypto industry the best of both worlds. 

The biggest win in the legislation for the crypto industry is giving significant regulatory authority over crypto to the Commodity Futures Trading Commission (CFTC), a chronically underfunded agency without a robust consumer protection mandate. It also ensures a good portion of the industry would be out of the purview of the more powerful Securities and Exchange Commission (SEC). While the SEC has thousands of employees, the CFTC has just a few hundred. There are questions about whether the CFTC, which currently regulates tangible assets like corn and cattle, has the institutional expertise to rein in a digital industry like crypto. 

The crypto industry, notably, has hired numerous former CFTC commissioners. The Head of Policy and Lobbying at FTX, a crypto exchange, is former CFTC Commissioner Mark Wetjen. Two former CFTC chairmen, Chris Giancarlo and James Newsome, are members of the board of advisors of the Chamber of Digital Commerce, a crypto industry lobbying group. 

SEC Chairman Gary Gensler has been clear that he considers most cryptocurrencies to be securities that should be regulated by his agency. “Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending,” Gensler said during a Congressional hearing in September. “Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.” 

Dennis Kelleher, a member of Biden's transition team and the co-founder of Better Markets, a financial reform advocacy group, says handing over regulation to the CFTC would be a disaster:

[T]he industry wants the CFTC as its regulator because it is the smallest financial regulator with the smallest budget. The financial industry and its allies in Congress have made sure that the CFTC has been chronically underfunded for decades.  While the professionals at the CFTC do an outstanding job with what little they are given to work with, they cannot fulfill their current responsibilities. It will be beyond hopeless if they are also given responsibility for a vast, growing, and technically complex industry like crypto on top of all that.

The legislation, according to Kelleher, is "designed to make the public think it’s regulating crypto" without providing meaningful reform.

New crypto tax breaks

While Gillibrand and Lummis' bill is purportedly about regulating the crypto, their bill includes several valuable tax breaks for the industry. Specifically, the bill would create a new "exemption from gross income for gains of up to $200 on cryptocurrency used to buy goods or services." There is no such exception if you were to sell a stock and use it to buy something. This is a special way for investors in crypto, which is already used as a vehicle for tax evasion, to avoid taxes on their gains. The bill would also "defer initial tax on digital coins earned from mining… until they’re sold."

"You would have a hard time proving that this kind of tax treatment exists elsewhere, or is justified by something else going on in the economy," John Buhl of the Tax Policy Center said.