(Bloomberg) -- As a popular digital currency crumbled this month, two unlikely allies in the US Senate stepped up their campaign to bring regulation to the $1.3 trillion crypto market. 

Cynthia Lummis, a conservative Republican from a Wyoming ranching family, and Kirsten Gillibrand, a moderate Democrat from Albany, New York, aren’t supposed to get along -- let alone work together. But with Washington riven by deep partisan division, they have bonded over one thing: crypto needing new rules.

The duo is planning to release a draft of their proposal as soon as next week that aims to prevent crises like the recent blowup of the TerraUSD stablecoin and settle some of the bureaucratic turf battles that have hobbled oversight. It’s a congressional election year in America, so it’s hard to say that a bill will become law, but their plan is already garnering a lot of attention.

Lummis, an enthusiast who first bought Bitcoin in 2013 at the urging of her son-in-law, isn’t the obvious choice to lead a clampdown. But, in a recent interview from her office in the US Capitol complex, she laid out a case for bringing clarity to an industry that’s grown to levels of once unimaginable complexity and risk. She described her partnership with Gillibrand, a securities lawyer by trade, as crucial to that effort. 

“Her enthusiasm and passion for it -- plus the fact that, being a New Yorker, she’s from such a significant and important financial center -- made her, like, the perfect partner,” said Lummis, 67. 

Washington’s efforts to oversee digital assets date back to the Obama administration but remain scatter-shot, rife with holes and overlapping jurisdictions. 

Calls for a legislative fix grew louder this month in the wake of the spectacular crash of TerraUSD, also called UST. The collapse of the algorithmic stablecoin triggered a week-long selloff that slashed the value of the overall cryptocurrency market by hundreds of billions of dollars.

‘Ups and downs’

“All the ups and downs of the market have confirmed why our regulatory framework is best,” Gillibrand, 55, said of the bill, seated in her private Capitol Hill “hideaway” office, a few steps away from the Senate floor. “Actually, it emphasized the importance of getting this done now.”

Some details remain in flux, but at a high level the senators’ plan would give the Commodity Futures Trading Commission significantly more power than it currently has. The regulator would directly oversee trading in tokens that meet the definition of a commodity, such as Bitcoin, the world’s largest cryptocurrency. Currently its jurisdiction is mainly tied to derivatives.

Meanwhile, the Securities and Exchange Commission would police coins that are used to raise money from the public like a stock offering would. It’s unclear whether those turf lines will satisfy some crypto diehards who want to free the asset class from the reach of the SEC’s onerous investor protections.  

Their plan would also significantly increase oversight of tokens like UST, which currently exist in a regulatory gray area. The bill would require stablecoins, regardless of their setup, to keep 100% reserves on hand and maintain a 1-1 peg with those assets, according to Gillibrand’s office. Stablecoins would be primarily overseen by banking regulators.

100% reserves

An advisory body would also be arranged to study and make recommendations for regulating future developments in the crypto market. The legislation would also exempt people from having to report and pay taxes when they make purchases using cryptocurrency if their resulting capital gains are $600 or less. Some argue that would make it more attractive to actually use digital currencies to pay at a checkout counter. 

Gillibrand and Lummis say they’ve sought ideas over the past several months from hundreds of people including crypto investors, bankers, coders and miners. The senators and their staff have fielded rounds of comments and concerns from the nascent, yet powerful, crypto influence machine in Washington. 

Kristin Smith, the executive director of the Blockchain Association, said that conversations with the senators’ offices have been “very productive,” but that there are still some details her group would like to see reworked. “We’re not going to put our full weight behind something until it’s at a place that we can live with,” she said. 

Regardless, Gillibrand and Lummis, who had barely done more than exchange pleasantries before the beginning of the year, say they’re in it for the long haul. Their relationship has blossomed into a friendship, they say, particularly, since announcing their partnership at a Politico event in March. 

“There are days when it almost seems like one staff -- it’s almost like we’ve done a mind meld,” said Lummis.

The pair envisions putting out the draft of the legislation followed by a more formal bill a month or so later. From there at least three different Senate committees would have to review different parts of the bill, and if it makes it past that gauntlet, it could be several more months before the full chamber even takes it up.

With congressional elections looming in November that could flip control of the House to Republicans, and maybe the Senate too, lawmakers may be reluctant to take up such a major piece of legislation this year. 

Laser eyes

Gillibrand first got turned on to crypto five years ago, when her then 13-year-old-son urged her to buy. But she grew more interested in the asset class after joining the Senate Intelligence Committee a little over a year ago and sitting in on hearings about virtual currencies and blockchain.  

Meanwhile, Lummis has been investing in digital assets for almost a decade. She recalls being invited in 2017 to the Satoshi Roundtable in Cancun, Mexico, one of the premier meetings of Bitcoin industry leaders. 

“I sat for two days in a windowless room, listening to Bitcoin miners, validators, and investors argue about policy, and it was so interesting,” Lummis said. “That’s kind of what launched me.” Now, her knowledge about crypto led some Senate colleagues to call her “Bitcoin Lady.” 

She’s even earned cool points with her grandson, who one night during bedtime prayers said he was thankful for his grandma’s “laser eyes”-- a reference to a meme used by Bitcoin enthusiasts to signify they’re bullish for crypto.       

While the paths to focusing on crypto are different, both are already seeing benefits in terms of attention and fundraising. 

Political contributions

A fifth of contributions to Lummis’s campaign committee in 2021 came from crypto executives or investors. Gillibrand has also started tapping into the money machine, with Smith -- the Blockchain Association leader -- holding a New York fundraiser on her behalf later this month. 

Lummis says she confirmed that crypto enthusiasts are a becoming a significant swath of the voting population by randomly asking Capitol Police officers if they owned Bitcoin after taking her senate seat early last year. Many said yes.

She’s pleased that Congress is starting to take notice.

“When I came to Washington, I found out that very few, if any, members of the Senate had an awareness of how big Bitcoin and other digital assets were becoming,” she said. “They’re now a significant constituency for many members of Congress.

©2022 Bloomberg L.P.