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The Importance of the Responsible Financial Innovation Act: An Analysis of the Proposed American Crypto Regime


On the heels of the European Union’s adoption of the Markets in Crypto Assets (MicA) legislation and Hong Kong’s opening of exchange licenses, the United States is on the verge of modernizing its crypto regulations. The Responsible Financial Innovation Act (RFIA), also known as the Lummis-Gillibrand bill, would introduce a similarly comprehensive crypto regime in the United States, dividing the responsibility of oversight to the Securities and Exchange Commission, Commodity Futures Trading Commission, and a new self-regulatory organization that would act as a go-between between the SEC and the CFTC. 

Although the RFIA has not been formally approved, stakeholders in cryptocurrency should pay special attention to it for three key reasons.

1) A Well-Spring of Support

The RFIA is not a messaging bill, a type of bill introduced by sponsors knowing it has no chance of passing but can generate media attention or curry political favor. The RFIA is quite the opposite: it has a solid base of support that could potentially catapult the bill into law in the next session of Congress. 

For starters, the RFIA is not a partisan effort. Republican Senator Cynthia Lummis and Democratic Senator Kirsten Gillibrand have reached across the aisle to champion the RFIA. Considering the bill’s broad support, the two senators may garner the necessary support from both Democrats and Republicans. 

The two senators also have the right pedigree. Each is part of a congressional committee that oversees the two existing agencies that would form the heart of the new crypto regime. Senator Lummis sits on the Senate Committee on Banking, Housing, and Urban Affairs, which oversees the SEC, while Senator Gillibrand belongs to the Senate Committee on Agriculture, Nutrition, & Forestry, which oversees the CFTC. Their influence and expertise may encourage more senators into supporting the bill who otherwise would have not had it been stewarded by less capable hands. The RFIA, in short, is right in their wheelhouse.

Finally, the RFIA is on its second version, after the initial one failed to make significant progress. As with all bills on their second tour of Congress, sponsors may be able to 

better align their policies to the specific desires of fellow senators. More importantly, the business environment may have shifted in favor of Senator Lummis and Senator Gillibrand. With more and more bankruptcies, hacks, and other operational and governance issues, constituents - and their senators - may be more keen on legislation that gets stricter with crypto businesses. In an interview with CoinDesk, Senator Lummis says as much, claiming that the bill could have prevented FTX’s collapse.

“The type of rehypothecation that was going on with FTX and some of the other attributes of FTX which caused it to fail would have been prevented had the Lummis-Gillibrand bill been in effect,” she said. 

In other words, the market is calling for legislative action, and it will view RFIA as the answer. The RIFA documentation indeed positions itself in this way. In its section-by-section overview, the lawmakers note that “[t]he consumer protection title of Lummis-Gillibrand has nearly doubled since the 2022 version, and includes provisions designed to prevent another FTX, including disclosures, proof of reserves, advertising standards and limits on lending.”

2) A Unicorn of Funding

Under the RFIA, the division of responsibilities between the SEC and CFTC cleaves around one concept: ownership. Assets that do not give investors a financial interest in a business such as debt or equity will not be considered securities. 

While their issuers would still need to make disclosures to the SEC, they would generally fall outside its mandate and oversight. Instead, these coins would be regulated by the CFTC. Because most coins on the market do not grant a form of ownership, the CFTC would oversee a greater majority of digital assets in comparison to the SEC. 

This segmentation may be beneficial as it gives SEC dominion over the type of ownership assets that play into the organization’s core competency and relieves it of the operational burden of dealing with all coins. The CFTC will then have the resources to regulate and exercise oversight over non-equity coins.  

The SEC and CFTC would be equally supported for the implementation of this new regime, receiving $1.4 billion in funding spread out over five years. The controversial aspect of this budget is that it would be funded through taxes on gains as well as on wash-sales tax restrictions that prevent retail investors from claiming losses on an asset that they quickly repurchase. 

3) World-Leading Consumer Protections

Part of the stated budget would go towards the creation of a self-regulatory organization for crypto. This organization would serve as a bridge between the SEC and CFTC and play the more important role of protecting consumers by prohibiting rehypothecation, which is when an exchange uses customer assets for transactions, investments, or loans, as FTX did when it lent $13 billion to sister company Alameda Research, among other transgressions. 

The regulation of these businesses would include affiliate supervision from the CFTC; registration processes that detail risk management, information-sharing, and consumer protection standards; and processes for fair treatment of shareholders in the event of bankruptcy proceedings. Businesses that violate any of these policies face punishment from this new organization. 

In addition to these stricter standards for governance, the RFIA also establishes rules for other areas of the industry. For example, some DeFi projects are not truly decentralized given that they have some form of centralized management. The RFIA would make the boundary between DeFi projects and those more centrally led tangible, as the latter will have to register as an exchange.

The RFIA would set up a new charter, such that only banks and credit unions regulated by the federal government or individual states can issue stablecoins. Organizations that meet these qualifications and are already issuing stablecoins will be prioritized for this licensing. 

For the RFIA to become law, there is still a long road ahead. The two sponsoring senators must gather more support from both sides of the aisle, put the bill for a vote across both the House of Representatives and the Senate, and finally obtain the President’s approval. 

What makes the bill so fascinating is that it reflects American sentiment towards cryptocurrency, demonstrating that there is a growing movement afoot to respond to the crisis of crypto companies with a legislative framework. Whether this regime will be the second coming Lummis-Gillibrand bill, a future version, or even another policy altogether remains to be seen, but one thing is for certain: regulatory change is coming to American cryptocurrency.