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Key Highlights From The Responsible Financial Innovation Act – Fin Tech


As cryptocurrencies and other digital assets continue to
establish themselves as economic powerhouses and enter into
mainstream acceptance, the call for regulation has grown louder. In
an effort to protect consumers and investors, Senators Cynthia
Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) introduced bipartisan
that would create a regulatory framework for
cryptocurrency markets and classify the majority of digital assets
as commodities. The 69-page Responsible Financial Innovation
(RFIA) would empower the Commodity Futures Trading
Commission (CTFC) to regulate crypto markets and set new legal
definitions for digital assets. The bill would also establish new
federal law governing stablecoins, implement taxes on small-scale
crypto payments, and codify regulatory jurisdictions. If
successfully implemented, the bill would go a long way toward
dispelling legal uncertainties that have plagued the cryptocurrency
space and further establishing its legitimacy.

Legal Definitions Related to Cryptocurrencies

One of the most glaring holes in the digital asset space is the
lack of legal definitions in the US Code. RFIA would regulate cryptocurrencies as commodities under
the purview of the CTFC, which would treat them as raw commodities
such as corn, coffee, gold, soybeans, and crude oil. The bill
proposes to endow the CTFC with new regulatory powers to oversee
cryptocurrencies, making it the primary regulator of the digital
asset spot market as well as creating a new registration category
for digital asset exchanges. The proposed legislation adds
“digital asset” and “digital asset exchange” to
definitions contained within the Commodity Exchange Act as well
as definitions for “virtual currency,” “payment
stablecoins,” “smart contracts,” “decentralized autonomous organizations
(DAOs),” and other related terms.

Cryptocurrencies Regulated as Commodities

Under RFIA, digital assets will be brought into the regulatory
sphere, bringing some semblance of order where little currently
exists. The text of the legislation distinguishes between digital
assets that perform as commodities or securities and those
comprising tangible, fungible assets that are offered or sold
concurrently with the purchase and sale of a security. The
determination of the category into which an asset falls would be
made by examining the rights or powers they convey to the owner.
The bill provides that digital asset companies will play the
primary role in determining and carrying out their regulatory
obligations while providing further clarification to regulators so
they can enforce the commodities and securities laws where

Digital assets would be defined as “ancillary” if they are
offered in conjunction with securities unless they behave like
securities that a corporation would issue to investors for the
purpose of accruing capital. The Securities and Exchange
Commission’s Howey Test holds that an asset should be
considered a security if four conditions exist:

  1. There is an investment of money.

  2. The asset represents a common enterprise.

  3. Contributors invest with the expectation of earning

  4. Those profits would accrue solely from the efforts of

Organizations can avoid categorization as a “security”
by satisfying specified periodic disclosure requirements. RFIA
would also direct the SEC not to treat cryptocurrencies and other
digital tokens like traditional securities unless the holder is
entitled to privileges enjoyed by corporate investors, such as
dividends, liquidation rights, and financial interest in the
issuer, as outlined in the Howey Test.

If passed, the legislation would give the CFTC wider power by extending its
reach into the crypto spot market in addition to creating a process
whereby crypto trading platforms such as Coinbase must register
their businesses. The CFTC would be authorized to generate revenue
by levying fees on the companies it oversees.

Taxation Reforms for Digital Assets

RFIA also introduces changes that would define and clarify the
taxation of digital assets.

Currently, any time a cryptocurrency holder sells a digital
asset, he or she may be required to pay capital gains tax on the
profits. Even if the digital currency is used only to buy a good or
service, the transaction constitutes a disposition of that asset.
If the holder makes money on the cryptocurrency because it has
appreciated in value, they would be liable for the tax. RFIA will
potentially eliminate this tax for small transactions.

As more merchants come to accept cryptocurrency as a form of
payment, tax reform is needed so consumers will not be taxed every
time they spend their Bitcoin or Ethereum. Under specified
conditions, RFIA would provide a de minimis exclusion of
up to $200 per transaction using virtual currency for the payment
of goods and services. In other words, consumers would be able to
buy products and services totaling less than $200 without incurring
capital gains tax.

Avoiding the Terra-ble Problem

Even before the TerraUSD (UST) meltdown,
regulators were concerned with the risk that stablecoins present in
the financial system. The Federal Reserve maintains that
they are “vulnerable to runs” and lack sufficient
transparency about the assets that purportedly support them. The
legislation seeks to implement regulations that would help avoid
situations such as Terracoin arising again. Issuers of
stablecoins—which are cryptocurrencies pegged to a
traditional financial asset such as the dollar—would have to
maintain cash or cash-equivalent reserves that would fully back
their digital assets. This reserve requirement for 100 percent of
the face value of all outstanding payment stablecoins is intended
to eliminate the collapse of the digital asset. They would also
have to complete detailed public disclosure requirements
for all stablecoin issuers.

What’s Next For RFIA?

RFIA still must overcome several hurdles before it can be
enacted into law. The legislation will be heard in the Senate
Committee on Banking, Housing, and Urban
, which oversees the Securities Exchange Commission,
and the Senate Committee on Agriculture, Nutrition, and Forestry, which
regulates commodities and the CTFC. Lummis is a member of the
Banking Committee, and Gillibrand sits on the Agriculture panel.
The bill is unlikely to become law before the congressional session
adjourns on January 23, 2023. It would then be taken up when the
new Congress convenes after the election. Even if it fails to
become law, the legislation can serve as a benchmark for future
bills and offer a game plan for wider crypto industry

Overall, the legislation intends to clarify the legal
uncertainty surrounding digital assets in the marketplace to create
a new regulatory framework. Together, the CTFC and the SEC are
powerful regulators who will be given more authority to oversee
virtual currencies and digital assets in the US. The latter would
regulate digital assets as a commodity and the former would police
companies, executives, and securities for greater investor

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


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