How the Lummis-Gillibrand Responsible Financial Innovation Act (S. 4356) Would Alter the Crypto Regulatory Landscape
INSIGHT
How the Lummis-Gillibrand Responsible
Financial Innovation Act (S. 4356) Would Alter
the Crypto Regulatory Landscape
July 22, 2022
In June 2022, Senators Cynthia Lummis and Kirsten Gillibrand introduced S. 4356, the Lummis-
Gillibrand Responsible Financial Innovation Act (RFIA). The Insight provides an overview of the bill,
including its implications for digital assets under securities and commodities laws; oversight of digital-
asset exchanges; and regulation of stablecoin issuers. Recent tumult in crypto markets underscores the
relevance of the associated policy discussion.
Securities Regulation
The RFIA would seek to clarify the respective jurisdictions of the Securities and Exchange Commission
(SEC) and Commodity Futures Trading Commission (CFTC) over digital assets. Currently, the SEC
exercises jurisdiction over digital assets that qualify as securities. The CFTC exercises anti-fraud and anti-
manipulation authority over digital assets that qualify as commodities and more expansive jurisdiction
over digital assets that qualify as derivatives.
The RFIA would create a new category of digital assets—“ancillary assets”—that would presumptively
qualify as commodities rather than securities under certain conditions. Ancillary assets would include
digital assets that are sold pursuant to investment contracts but do not provide their holders with financial
interests in a business entity (e.g., a right to dividends or interest payments). If trading in an ancillary
asset exceeds a specified threshold and the asset’s issuer engages in efforts that “primarily determine” the
asset’s value, the issuer would be required to make tailored semiannual disclosures regarding its business
operations and the ancillary asset itself. While the SEC would administer the disclosure requirements,
compliance with them would trigger a presumption that an ancillary asset is a commodity rather than a
security. The presumption could thus relieve market participants from other rules governing securities
issuers, exchanges, and advisers.
The RFIA would narrow the SEC’s jurisdiction over digital assets as the agency currently conceives it.
SEC guidance identifies several factors it uses to determine whether a digital asset is a security. While the
guidance identifies an entitlement to financial rights in a business entity as an indication that a digital
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asset is a security, it also flags the prospect of capital appreciation derived from the efforts of others as a
separate determining factor. The RFIA would thus circumscribe the SEC’s asserted jurisdiction insofar as
it would allow certain issuers whose managerial efforts “primarily determine” a digital asset’s value to
avoid the full panoply of securities law requirements.
Commodities Regulation
The CFTC has determined that certain digital assets—including Bitcoin, Ether, Litecoin, and Tether—are
commodities under the Commodity Exchange Act. CFTC-registered entities currently allow trading
futures and options for Bitcoin and Ether. To date, the CFTC has policed digital-asset markets through
enforcement actions, formal guidance, and its oversight of digital-asset derivatives.
The RFIA would grant the CFTC regulatory and enforcement authority over spot markets for fungible
digital assets, subject to certain exceptions. The bill would exclude from the CFTC’s jurisdiction digital
assets that entail financial rights in a business entity. Moreover, off-exchange digital-asset transactions
that do not involve CFTC registrants would be exempt from the CFTC’s regulatory authority.
The bill would also allow digital-asset exchanges to opt into a federal regulatory framework by
registering with the CFTC. Registered exchanges would be subject to requirements regarding their
treatment of customer assets, trade reporting and recordkeeping, and conflicts of interest.
CFTC registration would not relieve digital-asset exchanges of their existing duty to register as money
services businesses with the Financial Crimes Enforcement Network. Likewise, CFTC-registered spot
exchanges would not be permitted to offer derivatives contracts unless they are separately registered with
the CFTC as designated contract markets or swap execution facilities.
Implications for Depository Institutions
The RFIA would allow depository institutions to issue payment stablecoins and lays out a framework for
them to do so. Any depository that issues stablecoins would be required to maintain high-quality liquid
assets valued at 100% of the face value of all outstanding payment stablecoins.
Depositories would be required to provide public disclosures on the assets backing their stablecoins and
to redeem them at par in legal tender. The bill would require the federal banking agencies to coordinate
with state bank supervisors and adopt rules to implement capital and liquidity standards for stablecoin
issuers, as well as rules for third-party service providers, operational risk, and recovery/resolution
planning. It would also require depositories to report stablecoin activity on their Call Reports.
The bill would authorize the Office of the Comptroller of the Currency to charter and regulation national
banks with the sole purpose of issuing stablecoins. It would also establish tailored holding company
supervision for those national banks.
Another provision would ensure that Federal Reserve payment and settlement services are offered to any
federal or state-chartered depository institutions, regardless of whether they issue stablecoins, and would
require the Federal Reserve to make segregated balance accounts available upon request. The bill also
proposes codifying asset-custody standards for depository institutions.
Selected Considerations
The degree to which the proposed legislation would shift the current framework depends in part on how
certain provisions are interpreted. One set of ambiguities involves the bill’s proposed regime for ancillary
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assets. For example, while the bill would adopt a presumption that certain ancillary assets are not
securities, it does not identify the legal standards under which that presumption could be overcome.
Another wrinkle involves the requirement that an ancillary asset be issued pursuant to an investment
contract—which is itself a type of security—to qualify for the relevant presumption. Although the text
appears clear on this point, some commentators have questioned whether the bill’s drafters intended to
link the presumption to this requirement.
The tailored disclosure regime for ancillary assets applies only if an issuer or major shareholder of an
issuer engages in “entrepreneurial or managerial efforts that primarily determine” an asset’s value. The
precise meaning of that language would likely require further interpretation.
It is also unclear how markets and users will interact with exchanges that do not register with the CFTC.
It also remains to be seen whether joining spot and derivatives market exchanges under the CFTC’s
jurisdiction will allow the creation of futures markets for a broader swath of digital assets than those
currently permitted.
Author Information
Andrew P. Scott
Jay B. Sykes
Analyst in Financial Economics
Legislative Attorney
Eva Su
Paul Tierno
Analyst in Financial Economics
Analyst in Financial Economics
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