In a recent analysis of the Responsible Financial Innovation Act (RFIA), Democrat staff on the Senate Banking Committee criticized the Cryptocurrency Market Regulation Bill on several key factors.
The Democrats’ wing of the committee led by Sen. Elizabeth Warren argues the bill will put American retirement savings at risk and increase the risk of an economic meltdown. They also argue that they can’t prevent illegal financial activities and presidential corruption, leaving crypto investors unprotected.
RFIA: Controversial legislation with bipartisan roots
Democrat staff on the Senate Banking Committee released a poignant report this week on the nature of the RFIA. If passed, RFIA regulates the market structure of cryptocurrency.
The bill was originally introduced and co-hosted by Republican Sen. Cynthia Ramis and Democrat Sen. Kirsten Gillibrand, and was reintroduced a year later. It is still in the debate and drafting stages and has not passed either Congress.
It also competes with similar drafts, namely 21st Century Law (FIT21) and clear law financial innovation and technology.
In its report, the Democratic Senate Banking Committee argued that the RFIA has five major flaws that the Senate must fix. Without these adjustments, the results could be devastating for ordinary Americans and investors, just like in the crypto sector and traditional finance.
Weak the SEC and put the capital market at risk
The report raised concerns that the RFIA would create loopholes for assets, including cryptocurrencies, and circumvent the powers of the Securities and Exchange Commission (SEC).
The current bill accomplishes this by introducing the concept of “additional assets” that is not considered security.
This new definition effectively overturns the Howey test. The SEC uses this 75-year-old legal precedent to determine whether a transaction is an “investment agreement” and therefore security.
This framework allows companies to self-certify that they are issuing subsidized assets. They would essentially be exempt from the SEC rules without a meaningful chance for the SEC to challenge this claim.
“(RFIA)…takes a hammer into the $120 trillion capital market by reducing SEC authority and putting American retirement savings and equity investments at risk,” the report read.
It also removes major federal and state protections for investors.
“Even for Americans investing in non-cryptic companies, this means stripping up existing federal and state enforcement tools and protecting and supporting fraudulent investors while exposing their retirement accounts and investments to greater volatility,” Democrat staff added.
A decrease in surveillance from the SEC also leads to less supervision by banks.
Risk of a financial meltdown
By “opening the floodgates,” Democrat staff argued that by facilitating access to cryptocurrency activities, federal insured banks can expose their customers to a wide range of dangerous crypto practices.
“For example, bank holding companies are allowed to trade cryptocurrencies and even operate their own cryptocurrency hedge funds. Banks are also allowed to lend against unstable cryptocurrency collateral, establish a wallet software business, and trade in cryptocurrency derivatives, etc,” the report states.
If banks are permitted to engage in these activities, Crypto’s volatility could threaten the funds that the Federal Deposit Insurance Corporation (FDIC) uses to protect client savings.
If the bank fails due to losses from crypto investments, taxpayer-backed funds are responsible for covering these losses. This direct link creates unprecedented risks to the stability of traditional banking systems.
Staff also suggested that these mechanisms risk unlocking financial meltdowns. A crash in the crypto market can cause a wider crisis and can generally affect the reliability of banking services.
These checks and inadequate balances also translate into looser protections against illegal finances.
Not addressing illegal fiscal and national security risks
In the report, Democrats on the Senate Banking Committee expressed concern that the RFIA failed to close the legal gaps that allowed money laundering, terrorist financing and sanctions to be avoided.
The bill relies on further research and task forces to examine risks, but staff believes it is insufficient. It has also been reported that basic regulatory obligations cannot be extended to certain areas that certain parties often use for illegal purposes.
“The bill fails to address or extend basic obligations to exchanges, mixers and other entities in order for criminals, fraudulent states and terrorists to wash billions of dollars to fund illegal activities,” the report states.
The failure to close these loopholes also raises concerns that influential individuals can benefit financially unfairly from the sector.
Inadequate protection against presidential corruption
Senator Warren is undoubtedly one of the most vocal lawmakers over President Trump’s use of public office for his private interest. She has reiterated concerns that Crypto now constitutes a large part of Trump’s wealth, particularly due to his involvement in Memecoin and World Liberty Financial.
In the report, Democrat staff argued that the RFIA could not rule out the president’s potential for code corruption. Using Trump as an example, the report argues that the bill does not have a provision that prevents sit-in presidents from using their positions to benefit from the code.
“Since last year (Trump) and his business partners have received at least $620 million in payments from crypto tokens alone, without including other crypto investments.
These concerns are exacerbated by the fact that enforceable protections based on the draft bill are weak.
Inactive protection for crypto investors
Democrat staff concluded the report by claiming that RFIA representatives would provide overwhelming surveillance with the Commodity Futures Trading Commission (CFTC) rather than the SEC. The former described as a “weak, low-absorbing regulatory statistical regime” that is unequipped to oversee the crypto market.
This shift allows most crypto tokens to escape federal or state regulations entirely.
The report also specifically pointed out the bill’s paradox. The RFIA claims to maintain the SEC’s authority to combat fraud in the crypto market, but also prohibits the SEC from collecting the types of disclosures essential to enforce these anti-combustion laws.
“For example, by prohibiting the SEC from requesting financial statements from cryptocurrencies, the SEC cannot determine when cryptocurrencies will cook books or steal investors’ money,” he read.
By removing important tools to prevent fraud, RFIA ultimately cannot provide enforceable protection for crypto investors.
The Democrat senator has slammed the RFIA bill to support Trump’s crypto corruption.
