On June 6, 2022, U.S. Senator Kirsten Gillibrand of New York and U.S. Senator Cynthia Lummis of Wyoming proposed federal regulation of digital assets in the Responsible Financial Innovation Act (“RFIA”). The RFIA provides a definition of digital assets and assigns regulatory authority over various types of digital assets to the Securities Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). This post will provide an overview of the RFIA’s proposed treatment of digital assets and the political implications of the RFIA.
First, the RFIA proposes a broad definition of “digital asset.” In the RFIA, the term “digital asset” would mean a natively electronic asset that has economic, proprietary, or access rights or powers that is recorded using a “cryptographically secured distributed ledger technology” or any similar scheme. This includes virtual currency and ancillary assets, payment stablecoins, and other securities and commodities.
Notably, the RFIA also introduces the concept of an ancillary asset. An ancillary asset would be defined as an intangible, fungible asset that is “offered, sold, or otherwise provided to a person in connection with the purchase and sale of a security through an arrangement or scheme that constitutes an investment contract.” However, an ancillary asset does not include an asset that provides the asset holder with debt or equity interest in that entity, liquidation rights, an entitlement to an interest or dividend payment, a profit or revenue share derived from the entrepreneurial or managerial efforts, and any other financial interest.
Other definitions included in the proposed legislation are various digital assets including “virtual currency” and “payment stablecoin” and other related entities and technologies, including digital asset intermediary and distributed ledger technology.
Summary of Major Changes
The introduction of “ancillary assets” would represent a major change to the regulatory landscape. These would be assets that are not considered a security, but the RFIA would still subject the holder to certain limited disclosures to the SEC and the public. However, because the assets would be treated as a commodity rather than a security, they would not be subject to requirements concerning the distribution of securities under the Securities Act of 1933, and not subject to the registration requirements of the Securities Act of 1934.
This would be a major change from the broad definition of a security that the SEC currently applies in regulating digital assets. As mentioned in the definition above, under the RFIA, an asset is a security and not an ancillary asset if the asset provides the asset holder with debt or equity interest in that entity, liquidation rights, an entitlement to an interest or dividend payment, a profit or revenue share derived from the entrepreneurial or managerial efforts, or any other financial interest in the issuing entity. Under this definition, assets that the SEC would presently treat as securities would instead be considered ancillary assets.
As a result of the RFIA’s treatment of ancillary assets as a commodity rather than a security, this bill would grant primary regulatory power to the CFTC. The RFIA gives the CFTC exclusive jurisdiction over transactions in digital assets including the newly created category of ancillary assets. The CFTC would be required to adopt rules regulating futures commission merchants’ (FCMs) holding of digital assets, which generally track CFTC custodial rules. The RFIA would also provide for the creation of CFTC regulated digital asset exchanges. Sharing some regulatory responsibility, the SEC would be required to adopt amendments that would allow broker-dealers to keep digital assets in custody for customers.
One of the most important takeaways from the proposed RFIA is the Senators’ more permissive approach to crypto regulation. This is particularly surprising given Senator Gillibrand’s sponsorship of the bill in comparison to the more skeptical approach that other Democrats have taken to digital currency regulation. While it remains questionable whether this bill will pass this session, the RFIA is an indication that crypto regulation continues to be a priority for both sides of the aisle, albeit with differing goals.
Further, the RFIA proposal to grant exclusive jurisdiction over digital assets transactions to the CFTC may put pressure on the SEC and read as a rebuke of the SEC’s current approach to crypto regulation. Indeed, Chairman Gary Gensler has publicly suggested that this bill may “undermine the protections” that already exist.
 The Responsible Financial Innovation Act, S.4356, 117th Congress (2022), available at https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Responsible%20Financial%20Innovation%20Act%20%5bFinal%5d.pdf [hereinafter “RFIA”].
 Securities Act of 1933, Legal Information Institute, https://www.law.cornell.edu/wex/securities_act_of_1933 (last visited June 20, 2022); Securities Act of 1934, Legal Information Institute, https://www.law.cornell.edu/wex/securities_exchange_act_of_1934 (last visited June 20, 2022); RFIA at 15.
 U.S. Securities & Exch. Comm’n, Framework for “Investment Contract” Analysis of Digital Assets (last modified April 3, 2019), https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
 The Howey Test would still apply so assets that would be securities under Howey would not be ancillary assets. Under the Howey test, an investment contract is “a contract, transaction or scheme whereby a person  invests his money in  a common enterprise and  is led to expect profits solely from the efforts of the promoter or a third party . . . .” S.E.C. v. W. J. Howey Co., 328 U.S. 293, 298-99 (1946); RFIA at 13.
 Paul Kiernan, Crypto Legislation Could Undermine Market Regulations, Gensler Says, Wall Street Journal, (June 14, 2022, 3:30 PM ET), https://www.wsj.com/articles/crypto-legislation-could-undermine-market-regulations-gensler-says-11655231512?mod=mhp