The US ‘’Responsible Financial Innovation Act’’ Summary 2021 Part 2

In the previous post, we have given a brief introduction to the “Responsible Financial Innovation Act” (RFIA) and how it will reshape the crypto market and contrasted it with Mongolian Law on Virtual Asset Service Providers.

In this post, we are going to explore the securities innovation section of the RFIA. One of the RFIA’s most consequential features is that it would consider most digital currencies such as bitcoin and ether to be commodities, not securities. This kind of digital currency would be regulated by the Commodity Futures Trading Commission (CFTC), instead of the Securities and Exchange Commission (SEC) thus CFTC would be given “exclusive jurisdiction” over such assets. However, it would need to comply with certain SEC reporting requirements.

The RFIA proposed a clear standard to decide when digital assets should be considered securities and when they should be considered commodities. According to existing US securities law, a tangible asset and fungible asset issues under an investment contract would be considered “ancillary assets’’ where the assets offered or sold in connection with the purchase or sale of security constituting an investment contract and that do not provide the holder of the asset with debt or equity rights, liquidation rights of the issuer, the right to profits from the issuer, or any other financial interest in the issuing entity.

Under the RFIA, an “ancillary asset” would not need to be completely decentralized and it could take advantage of managerial efforts that determine its value but would still not be considered a security because it fails to give its holder the requisite financial interests in a particular business entity. Furthermore, issuers of ancillary assets would also need to comply with certain disclosure requirements set forth by the SEC so that such ancillary assets are presumed to be a commodity.

However, once an ancillary asset rises to a specific level of decentralization, defined, among other things, by minimal managerial or entrepreneurial efforts, an issuer would likely escape the SEC reporting requirements while retaining its status as a commodity.

The RFIA set clear guidelines for how to fulfill the SEC custody requirements to maintain a satisfactory control location with respect to digital assets that are securities.

[1] “ancillary assets” under RFIA is defined as intangible, fungible “digital” assets offered or sold in connection with the purchase or sale of a security constituting an investment contract, as defined by the SEC’s Howey Test, and that do not provide the holder of the asset with debt or equity rights, liquidation rights of the issuer, the right to profits from the issuer, or any other financial interest in the issuing entity.
[1] The RFIA s 301
[1] The RFIA s 302