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The Responsible Financial Innovation Act: A Bipartisan Proposal for Digital Asset Regulation
June 14, 2022
In a political environment where few issues find common ground in the proverbial congressional aisle, U.S. Senators Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., have written a bipartisan bill that should trigger the lengthy process of bringing federal regulatory and tax treatment to digital assets. The Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) seeks to create a comprehensive regulatory framework for the digital assets space, potentially upstaging what is often considered a crypto-skeptical Administration and federal regulators.
The comprehensive legislation addresses tax, securities, commodities, consumer protection, payments, and banking laws. For legal and compliance professionals, as well as their alternative asset manager clients, great interest lies in legal definitions and the jurisdiction to be afforded to federal regulatory agencies. Of course, the proposed definition of “digital asset” is of utmost importance, and it helps further define terms such as virtual currencies, ancillary assets, payment stablecoins, and other securities and commodities. Similarly, the definition of “digital asset intermediary” will assist in writing rules around licensing, registration, and other authorization for conducting market activities relating to digital assets.
Given the vast reach of the RFIA and the multiple congressional committees to be navigated, the bill has little chance of advancing this late in an election year, and many iterations of the proposed legislation are expected. As the bill twists and turns through the committees in 2023, attempting to take relevant provisions from previously written bills, the legislation will likely split into several pieces with Lummis and Gillibrand shepherding it through the Banking Committee and Agriculture Committee, respectively.
The RFIA includes provisions to clarify when digital assets are properly treated as commodities, including a rebuttable presumption that certain digital assets offered as part of investment contracts are not themselves securities if they do not have the essential characteristics of a “security.” Currently, an analysis is required in this regard, including application of the U.S. Supreme Court’s 1946 “Howey Test” to determine whether an investment contract exists. Many consider the new bill a big win for the U.S. Commodity Futures Trading Commission (CFTC), as it grants the agency exclusive spot market jurisdiction over all fungible digital assets that do not confer debt or equity interest, a profit share, or similar right in a business entity, including “ancillary assets” (although there is a carve out for “digital collectibles and other unique digital assets”).
To influence progress and congruency, the RFIA requires interagency coordination among federal financial regulators, and specifically calls for the agencies to provide individualized interpretive guidance with respect to application of a statute, rule, or policy under the regulators’ jurisdiction. Front and center to this momentous legislation are the CFTC and the U.S. Securities and Exchange Commission (SEC). The bill authorizes the industry watchdogs, in consultation with digital asset intermediaries and the digital asset industry, to conduct a study on self-regulation in the digital asset markets and to develop a proposal for the establishment of registered digital asset associations. To that end, industry participates, including a prominent cryptocurrency exchange, have proposed the creation of a self-regulatory organization called the Virtual Commodity Association. Not to be forgotten is the National Futures Association (NFA), the industrywide, self-regulatory organization for the U.S. derivatives industry.
Excitement continues to grow around digital assets. The breadth and influence of these financial instruments and assets cannot be overstated. From cryptocurrency and NFTs to Web 3 and the metaverse, finance, investing, commerce, and culture are changing before our eyes. Broad, federal monetary initiatives are underway, including those of governments in the development of central bank digital currencies, which includes a U.S. digital dollar. Lawmakers have finally given credence to the inevitable, and while the RFIA is a great first step, so much work is yet to be done. As Jeff Dorman, Co-Founder and Chief Investment Officer of Arca Funds, said last week at the highly celebrated blockchain event Consensus 2022, “There are no experts.” While this may be true for now, the ever-increasing appetite to legitimize digital assets is putting relentless pressure of governments around the world. From this, experts will surely emerge.
About Apogee Compliance LLC
Apogee Compliance LLC provides regulatory compliance support services to alternative asset managers registered with the CFTC/NFA and SEC. Apogee is a pioneer in the digital assets regulatory space. The firm is a select, boutique compliance consultancy that seeks to establish and foster relationships with the most talented and accomplished investment management firms in the world, concentrating on the United States, United Kingdom, and Brazil.
For more information visit www.apogeecompliancellc.com or contact Scott Brindley, Managing Partner, at sbrindley@apogeecompliancellc.com.