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RFIA Seeks Crypto Clarity And Consumer Protection – Fin Tech


With more investors participating in cryptocurrency markets, the
need to clarify and modernize the rules governing digital asset
trading, buying, selling, and taxation has become ever more
pressing. Senators Cynthia Lummis (R-WY) and Kristen Gillibrand
(D-NY) responded earlier this month by introducing the Responsible Financial Innovation
(RFIA) as a measure to protect consumers, brokers,
financial institutions, coin issuers, investors, and other market
participants. RFIA would expand the Commodities Future Trading
Commission’s (CFTC) purview into the crypto asset sector and
update Securities and Exchange Commission (SEC) parameters for
regulating and taxing digital assets. The bill would distinguish
between crypto “ancillary” assets to be overseen by CFTC,
and crypto “securities” which, like stocks and bonds,
would fall under the SEC’s jurisdiction. Other provisions
contained within RFIA would include consumer protection reforms,
clearer definitions of “broker” and decentralized autonomous
(DAOs), and more.

Our previous article on this topic explored the bill’s
key legal definitions, the cryptocurrencies that would be regulated
as commodities, taxation de minimis for certain sales of
digital assets, and how the Act seeks to avoid the stablecoin
conundrum. Here, we will discuss additional RFIA provisions such as
brokers’ roles, information disclosure, consumer protections,
and DAOs.

Brokers and Selling Crypto Assets

Section 202 of RFIA narrows and
clarifies the definition of a “broker” within the crypto
asset space as “any person who (for consideration) stands
ready in the ordinary course of a trade or business to effect sales
of digital assets at the direction of their customers.” It
would amend the definition included in the Internal Revenue Code of
1986 and the Infrastructure Investment and Jobs Act that some have
interpreted as including transaction administrators and

The definition of “broker” excuses many employees from
reporting and fiduciary responsibilities. Only people who perform
the traditionally understood activities done by brokers (i.e.,
effecting trades for retail clients) and earn compensation by
connecting crypto sellers with buyers would be subject to taxation
of income accrued through these duties. Crypto miners, buyers, and
other participants would not be taxed on their investments until
they are converted to cash.

RFIA reforms how brokers can sell cryptocurrencies in the
marketplace, requiring the reporting of certain information on
digital assets. In mandating custody procedures, RFIA would require
the SEC to adopt amendments to Rule 15c3-3 (the “Customer
Protection Rule”) under the Securities Exchange Act of 1934 to
permit broker-dealers to take custody of digital assets for
customers. If ultimately enacted, RFIA would provide a meaningful
and long-awaited path for broker-dealers to maintain custody of
digital asset securities.

Digital Assets Safe Harbor Trading Provision

Currently, non-US citizens who trade stocks, securities, and
commodities—even when using a domestic agent—are not
subject to domestic taxes because their activity is not considered
as being conducted within the country. To extend this protection to
cryptocurrency investors, RFIA carves out an exception for digital
assets. The introduction of a “safe harbor” provision for
non-Americans who sell digital assets allows non-US traders without
US-based offices to use a domestic financial institution to conduct
their trading activities.

Section 203 creates this trading “safe harbor”
exception under section 864(b)(2) which covers
commodities and securities trading. Non-US based traders would not
be considered conducting business “within” the US for
purposes of taxation as long as they are customarily dealt with in
the digital asset exchange. However, if the non-US trader does
maintain a US-based office or a fixed place of business, this
provision would not apply because the exchange would occur on US
soil and therefore be taxable.

Consumer Protection Provisions

If enacted, the bill will provide additional protection
provisions for consumers. As cryptocurrency has become more popular
and mainstream, many have bought often-volatile digital assets
based on incomplete and incorrect information or understanding of
the risks involved. When these digital assets collapse, as occurred
with Terra/UST stablecoin, millions of dollars of
collective consumer capital can be wiped out. Crypto markets carry
inherent risks, so consumers must have sufficient information and
disclosures to help them make educated and informed investment
decisions. RFIA Section 505 would require suppliers of digital
assets to clearly disclose information about their product in
customer agreements, including a discussion of investment risk,
applicable fees, redemption procedures, digital asset treatment in
bankruptcy actions, and more.

RFIA’s consumer protections extend beyond brokers and
sellers. The bill also would require customer disclosure
requirements from digital asset service providers, which would
include digital asset intermediaries and financial institutions as
defined by section 1a of the Commodity Exchange
(7 U.S.C. § 1a). The legislation further requires that
any person conducting digital asset activities pursuant to a
federal or state charter, license, registration, or other similar
authorization would need to be disclosed. Additionally, the Act
requires the SEC to complete its Custody Rule (17 C.F.R. § 240.15c3-3) and
Consumer Protection Rule (17 C.F.R. §
) within 18 months of enactment. The new
rules would need to account for the regulatory changes in custody
practices, digital assets, broker-dealer practices, changes in
market structure, technology, and parity of state and national

The legislation closely follows other emerging approaches to
crypto market regulation, such as the European Union’s proposal
for governing markets in crypto-assets, and
amending Directive (EU) 2019/1937 (MiCA). It imposes similar
mandates on token issuers, brokers, and other market participants
as RFIA.

Decentralized Autonomous Organizations

The legislation also includes provisions for decentralized
autonomous organizations. These entities are relatively new
phenomena but are becoming increasingly popular. There are some 4,000 DAOs with over $8 billion
in assets in the US, with the majority organized in Wyoming and the Marshall Islands.
These entities have become power players in the crypto and NFT

RFIA attempts to “mainstream” DAOs, at least for the
purposes of categorizing them in the IRS tax code. The Act
specifies that certain DAOs constitute business entities for
taxation purposes. These entities must be properly organized or
incorporated under a state’s DAO statute. Under the law, DAOs
can be structured as an LLC, corporation, partnership, foundation,
cooperative, or similar organization.

Going Forward

RFIA has the potential to reform the digital asset marketplace
within the US by bringing long-overdue government regulation and
clarity to the space. If signed into law, its provisions would be
rolled out within certain time frames—not overnight. Some of
the tax revisions would go into effect from December 31, 2022,
while others would not take effect until 2025. Until then, RFIA
will have to overcome the hurdles of congressional committees in
order to eventually become law. This gives industry participants
time to plan their strategies for dealing with increased regulation
and to consult an attorney experienced in the space to reduce
their tax burden and ensure they comply with the new rules on

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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