On June 7, 2022, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act (“RFIA”). If enacted, the RFIA will mark the first comprehensive federal legislation to include blockchain, cryptocurrency, and digital assets. Of particular significance is how the RFIA analyzes digital asset innovation as it relates to multiple disciplines, including banking, consumer protection, securities, and taxation.
The key provisions of the crypto bill include:
- Defining “digital assets” and “ancillary assets,” in general, and specific digital assets, in detail (i.e., stable coins, virtual currencies);
- Confirming when digital assets are appropriately treated as commodities
- Providing a regulatory framework for treating various digital assets under the auspices of the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) and how digital assets are affected by tax laws, anti-money laundering rules, and securities regulations; and
- Requirements for final guidance and studies on several regulatory uncertainties not mentioned by the RFIA
Politically, Senator Gillibrand’s participation and ardent support of the digital assets space — which runs counter to that of her more skeptical colleagues (namely Senators Sherrod Brown (D-PA) and Elizabeth Warren (D-MA)) — is a noteworthy development.
The RFIA’s tax proposals are equally interesting, including:
- exempting personal virtual currency transaction gain from tax, under $200 per transaction;
- deferring the taxation of mining and consensus-layer staking rewards until disposition;
- requiring the IRS to adopt guidance “relating to” the treatment of payment stablecoins as debt for U.S. tax purposes;
- providing that loans of digital assets in a transaction like that of a securities loan are not a taxable event to the lender; and,
- treating decentralized autonomous organizations (“DAOs”) as business entities by default in the event that DAOs are “properly incorporated or organized under the laws of a State or foreign jurisdiction as a decentralized autonomous organization, cooperative, foundation or any similar entity.”
Note: The bill is silent on the crypto reporting rules added last November by the Infrastructure Investment and Jobs Act. Under those rules, transactions involving $10,000 or more in digital assets, like similar transactions in cash, must be reported to the IRS. That requirement is currently being challenged as unconstitutional in a case in the U.S. District Court for the Eastern District of Kentucky. Stay tuned.
The RFIA’s breadth, in terms of addressing all notable sectors of regulatory oversight in one single piece of legislation, is unique among the many other digital assets related bills that are on the Congressional docket for 2022: (The Digital Commodity Exchange Act (H.R. 7614); Virtual Currency Tax Fairness Act of 2022 (H.R. 6582); Keep Innovation In America Act (H.R. 6006); The Securities Clarity Act (H.R. 4451); U.S. Virtual Currency Consumer Protection Act of 2021 (H.R. 5100); The Blockchain Regulatory Certainty Act (H.R. 5045); The Token Taxonomy Act (H.R. 1628); Clarity for Digital Tokens Act of 2021 (H.R.5496); The Eliminate Barriers to Innovation Act of 2021 (H.R. 1602); The Digital Taxonomy Act (H.R. 3638)). Although it will take time (likely 2023) and months of scrutiny and feedback for the RFIA to become law, the bill provides hope and direction, in addition to marking Senator Lummis and Gillibrand as industry leaders in this rapidly moving space.
Count on Friedman
This bill faces many challenges in its path to passage. Friedman LLP’s digital currency practice will be following it closely. We will post updates as they happen. In the meantime, feel free to contact your Friedman LLP advisor with any questions.
