In a recent analysis of the Responsible Financial Innovation Act (RFIA), the Democratic staff of the Senate Banking Committee criticized the crypto market regulation bill over several key components.
The Committee’s Democrat wing, led by Senator Elizabeth Warren, argues that the bill would endanger Americans’ retirement savings and increase the risks of an economic meltdown. They also contend that it would fail to prevent illicit financial activities and presidential corruption, leaving crypto investors unprotected.
RFIA: A Controversial Bill with Bipartisan Roots
The Democratic staff of the Senate Banking Committee released a scathing report this week on the nature of the RFIA. If passed, the RFIA would regulate the market structure of cryptocurrencies.
The bill was originally introduced and co-sponsored by Republican Senator Cynthia Lummis and Democratic Senator Kirsten Gillibrand in June 2022 and re-introduced a year later. It is still in the discussion and drafting phase and has not been passed by either chamber of Congress.
It also competes with similar drafts, namely the Financial Innovation and Technology for the 21st Century Act (FIT21) and the CLARITY Act.
In its report, the Democratic Senate Banking Committee argued that the RFIA has five major flaws the Senate must fix. Without these adjustments, the results can be catastrophic for regular Americans and investors from the crypto sector and traditional finance alike.
Weakening the SEC and Endangering Capital Markets
The report expressed concern that the RFIA would create a loophole for assets, including cryptocurrencies, to sidestep the authority of the Securities and Exchange Commission (SEC).
The current draft bill would achieve this by introducing the concept of an “ancillary asset,” which isn’t considered a security.
This new definition would effectively overturn the Howey test. The SEC uses this 75-year-old legal precedent to determine whether a transaction is an “investment contract” and, therefore, a security.
The framework would allow companies to self-certify that they are issuing ancillary assets. They’d essentially be exempt from SEC rules without a meaningful chance for the SEC to challenge this claim.
“[The RFIA]… takes a hammer to our $120 trillion capital markets by shrinking the SEC’s authority and risking Americans’ retirement savings and stock investments,” the report read.
It would also strip away key federal and state protections for investors.
“Even for Americans who invest in non-crypto companies, this would mean exposing their retirement accounts and investments to greater volatility while stripping away existing federal and state enforcement tools to protect and help investors who get scammed,” the Democratic staff added.
Reduced oversight from the SEC would also lead to less supervision for banks.
Risking a Financial Meltdown
By “opening the floodgates” and allowing easier access to cryptocurrency activities, the Democratic staff contended that federally insured banks could expose their customers to a wide range of risky crypto practices.
“For example, bank holding companies would be allowed to trade crypto and even operate their own crypto hedge funds. Banks would also be permitted to lend against volatile crypto collateral, establish wallet software businesses, and deal in crypto derivatives, among other activities,” the report read.
When banks are allowed to engage in these activities, crypto’s volatility could threaten the fund that the Federal Deposit Insurance Corporation (FDIC) uses to protect customer savings.
If a bank fails due to losses from crypto investments, the taxpayer-supported fund would be responsible for covering those losses. This direct link would create an unprecedented risk to the stability of the traditional banking system.
The staff also suggested that these mechanisms risk unleashing a financial meltdown. A crash in the crypto market could trigger a broader crisis, potentially impacting the reliability of banking services in general.
The inadequacy of these checks and balances also translates to looser protections against illicit finance.
Failure to Address Illicit Finance and National Security Risks
In its report, the Democratic staff of the Senate Banking Committee expressed concern over the RFIA’s failure to close the legal gaps that allow for money laundering, terrorist financing, and sanctions evasion.
The bill relies on further studies and task forces to examine risks, which the staff deems insufficient. It also reportedly fails to extend basic regulatory obligations to specific areas that certain actors often use for illegal purposes.
“The bill fails to address decentralized finance or extend basic obligations to exchanges, mixers, and other entities that have been used by criminals, rogue nations, and terrorists to launder billions of dollars to fund illicit activity,” the report said.
The failure to close these loopholes also raises concerns that influential individuals could unfairly benefit financially from the sector.
Inadequate Safeguards Against Presidential Corruption
Senator Warren is arguably one of the most vocal congresspeople over President Trump’s use of public office for private gain. She has repeatedly voiced concern that crypto now comprises most of Trump’s wealth, specifically from his meme coin and involvement in World Liberty Financial.
In its report, the Democratic staff argued that the RFIA fails to eliminate the potential for presidential crypto corruption. Using Trump as an example, the report claims the bill lacks provisions that would stop a sitting president from using their position to benefit from crypto.
“Since last year, [Trump] and his business partners have received at least $620 million in payouts from his crypto tokens alone, not including his other crypto investments. Congress should stop the most egregious presidential financial corruption in the history of our nation,” it read.
Such a concern is exacerbated by the allegedly weaker enforceable protections under the draft bill.
Lackluster Protections for Crypto Investors
The Democratic staff concluded its report by arguing that the RFIA delegates overwhelming oversight to the Commodity Futures Trading Commission (CFTC), rather than the SEC. It described the former as a “weak, underresourced, deregulatory regime,” unequipped to oversee the crypto market.
This shift would also allow most crypto tokens to entirely escape federal or state regulation.
The report also specifically pointed to a paradox in the bill. Though the RFIA reportedly claims to maintain SEC authority to combat fraud in the crypto market, it also prohibits the SEC from collecting the types of disclosures essential for enforcing those anti-fraud laws.
“For example, by prohibiting the SEC from requiring financial statements from crypto issuers, the SEC cannot identify when crypto companies cook the books or steal investors’ money,” it read.
By removing essential tools to prevent fraud, the RFIA ultimately fails to provide crypto investors with enforceable protections.
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