What You Need to Know
- The Responsible Financial Innovation Act seeks to clarify some key issues related to cryptocurrency taxation and regulation.
- The new legislation narrows the definition of broker to address concerns that the current definition is overly broad.
- A safe harbor provision could encourage digital currency to function more like currency.
It’s no secret that cryptocurrency regulation has been high on Congress’ list of priorities this year.
Early in June, a bipartisan group of senators introduced the Responsible Financial Innovation Act. If enacted into law, the bill would clarify some key issues related to cryptocurrency taxation and regulation. These provisions are designed to address some significant concerns that cryptocurrency insiders have raised following the most recent round of cryptocurrency-related legislation, contained in President Biden’s Infrastructure Investment and Jobs Act.
As cryptocurrency investments become more mainstream, it’s more important than ever for advisors to stay abreast of the latest regulatory developments that could impact their clients now and going forward.
New Regulatory Scheme
The Responsible Financial Innovation Act would classify most types of digital assets as ancillary assets (in other words, intangible and fungible assets that are offered or sold in connection with the purchase and sale of a security). The assets would therefore be treated as commodities, akin to oil, gold or beef. The Commodity Futures Trading Commission (CFTC) would therefore be given authority to regulate much of the industry.
The law would not treat cryptocurrencies as traditional securities subject to the SEC’s jurisdiction unless the investor’s rights mirror those typically associated with securities (for example, dividend rights or some type of financial stake in the issuer).
Clarifying the Definition of ‘Broker’
Back in November 2021, President Biden signed the Infrastructure Investment and Jobs Act into law. The law contained provisions designed to increase reporting obligations from facilitators of digital asset transactions. More specifically, the law expanded the definition of “broker,” defining the term as “any person who (for consideration) is responsible for providing any service effectuating transfers of digital assets on behalf of another person.”
A ”broker” is obligated to report cryptocurrency transactions to both the IRS and the investor. Many industry players argued that the new definition was overly broad, and could trap software developers, miners and others who may lack sufficient access to information necessary to provide accurate reporting.