RFIA 2025: Updated Regulatory Frameworks and Senate Response to CLARITY

On September 5, 2025, the Senate Banking Committee released a second discussion draft of the Responsible Financial Innovation Act of 2025, addressing digital asset market structure. This 182-page draft serves as a follow up to the initial 32-page draft released in late July, which itself was a response to the House’s Digital Asset Market Clarity Act of 2025 (“CLARITY Act”). This new draft expands upon the initial draft, focusing largely on the SEC’s role in regulating digital assets.

Increased Delineation and Definition

The new draft proscribes a number of digital asset-related definitions lacking from the initial discussion draft and CLARITY Act. The following are new terminology introduced in this latest draft:

• Ancillary Asset: An intangible asset (such as a digital asset) that is offered, sold, or distributed pursuant to an investment contract. These assets are not considered a security under this draft, although the contracts governing their sale are.
• Ancillary Asset Originators: Persons or entities who initially offer, sell, or distribute an ancillary asset
• Gratuitous Distribution: In a practical sense, this term is the vessel for carving out staking and airdrops from increased regulatory scrutiny, beyond anti-fraud and anti-manipulation
• Distributed Ledger: technology through which data is distributed across a network with public digital ledgers of transactions, and which uses cryptography for integrity maintenance

Title I – Responsible Securities Innovation

Matching the tone of the SEC and previous Congressional hearings and discussion, including the CLARITY Act, the new draft relies on the SEC’s exemptive authorities for rule applicability. These exemptions would be allowed to apply to the offer or sale of investment contracts under $75 million or 10% of the dollar value of outstanding ancillary assets, by non-investment-company-designated originators. To claim exemptions, originators would need to file notices of reliance at least 30 days before the offering date; these notices are not deemed to be a “registration statement” for purposes of the Securities Act.

For the investment contracts themselves, the SEC would be required by the new draft to create final rules for defining and governing investment contracts within two years of enactment; an aspect overlooked by the CLARITY Act. Mirroring the Howey Test, the new draft’s requirements for a contract to be considered an investment contract contain the following criteria:

• An investment by an investor over a de minimis amount
• Said investment into an enterprise or venture, no matter organization or incorporation status
• An expressed or implicit agreement or arrangement is required when the issuer makes, directly or indirectly, promises to perform entrepreneurial or managerial efforts on behalf of the enterprise
• The investor reasonably expects profits such as enterprise income sharing, return on investment, capital appreciation, or on the context of statements made by the counterparty
• Profits are derived from the efforts of the counterparty or its agents on behalf of the enterprise where such efforts are post-sale and essential to the operation or success of the enterprise and are not ministerial, technical, or administrative

The new draft also modernizes the SEC’s treatment of various financial and regulatory compliance procedures, ranging from net capital requirements to conduct standards. To accommodate utility tokens, the new draft requires the SEC to issue regulations which shield ancillary assets from classification as a disqualifying interest when the market value is derived or expected to be derived from its system-based utility on a digital network or from the broader adoption and use of such a system. With regards to book and records compliance, the draft would require the SEC to allow the consideration of records from a distributed ledger system for satisfaction.

Title II – Protecting Against Illicit Finance

The new draft would treat all digital asset service providers as financial institutions for Bank Secrecy Act purposes, placing compliance requirements on actors for sanction, AML, KYC, and due diligence. This classification would be somewhat modified for payment stablecoin issuers, as the new draft requires Treasury guidance within 120 days of enactment which exempts these issuers from strict liability as long as they conduct due diligence on primary customers, maintain controls to prevent sanctioned addresses from accessing the stablecoin, and possess the ability to freeze and prevent transfer of assets owned by a sanctioned entity.

Mirroring the market structure policy evolution in 2025, the draft seeks to  elicit industry knowledge and feedback in developing novel illicit finance regulation. Title II would establish two private-public partnerships; one focusing on financial risks and threats, and the other tasked with addressing terrorist and illicit financing.

Title III – Responsible Financial Innovation

Under Section 301 of the new draft, financial holding companies and national banks may “use a digital asset or distributed ledger system to perform, provide, or deliver any activity, function, product, or service that the financial holding company is otherwise authorized by law to perform, provide, or deliver,” which would provide the validation many financial institutions seek prior to fully incorporating digital assets activities into their operations. The new draft also calls for the Federal Reserve, Office of the Comptroller of the Currency, and the FDIC to develop risk and capital requirements for insured depository institutions that address netting agreements which incorporate termination and closeout netting.

Title IV – Responsible Regulatory Innovation

The new draft, unlike CLARITY, would establish a regulatory sandbox, jointly managed by the CFTC and SEC, to encourage authorized participants to test and develop innovative financial products. Activities eligible for the sandbox would be required to be listed by the CFTC and SEC and updated periodically to future-proof the utility of the sandbox. Firms may participate for no more than two years, with the ability for an additional year through one of the regulators granting an extension. Exit from the sandbox is also through joint jurisdiction.

To further spur innovation while enabling thoughtful regulatory craftsmanship, the new draft also proscribes a variety of studies and reports on innovations. Engagements required under the act would include:

• A year-long study period on real-world asset tokenization, to be jointly conducted by the SEC and CFTC, with notice, comment, and rulemaking to follow
• Within two years, a report by the Comptroller General on distributed ledger compliance tools, AML/KYC best practices, and sanctions screening
• Periodic reporting by the Federal Reserve, CFTC, Department of Treasury, FDIC, FHFA, NCUA, OCC, CFPB, and SEC on the implementation of the bills provision

Title V – Protecting Software Developers and Software Innovation

The new draft provides preemption protections and exempts software developers from the financial and regulatory scope of the bill, so long as they are participating directly or indirectly in the operation of a distributed ledger system or when providing technical assistance to a decentralized finance trading protocol. These protections would also extend to non-fungible tokens (NFTs), so long as the offer, sale, and transaction of the NFT do not mean every element of an investment contract; is a mass-minted series of items; or involved fractionalized interest. Safe harbor also would extend to decentralized physical infrastructure networks (DePINs), which would allow for further innovation in data and technological infrastructures through the use of distributed ledger technology. As discussed in Title II, the network tokens would be exempted from security classification so long as they meet all conditions.

Non-controlling developers – those who do not have the right or ability to control transactions without the approval of a third party – would not be required to be subjected to money transmitter regulations nor registration requirements under the new draft.

With regards to self-custody, the new draft goes further than CLARITY by prohibiting federal agencies from interfering with “the ability to self-custody digital assets using the self-hosted wallet or other means top conduct transactions for any lawful purpose.” Under CLARITY, the right to self-custody is affirmed, however a prohibition is not proscribed.  

Title VI – Bankruptcy and Effective Date

The new draft largely mirrors CLARITY, and standard legislative practice, in providing protections for customers who have claims in bankruptcy and ensuring customer asset segregation from those of the bankrupt.

The timeline proscribed by the new draft for promulgation and implementation of provisions, generally 360 days after enactment, is longer than CLARITY’s 270 days, allowing for further engagement and more time for study and refinement before final rulemaking is ordered.

Senate Democrats Market Structure Response and Future Prospects

This new draft was led by Republicans, namely Senate Banking Committee Chairman Scott and Senators Lummis, Hagerty, and Moreno. On September 9, 2025, 12 Democratic Senators – all of whom voted for the GENIUS Act – released a response to the new discussion draft urging for the following principles to be included in a final product:

• CFTC jurisdiction over spot markets for non-security digital assets
• Clarification on the legal status of digital assets to developers, investors, and platforms while maintaining efficient markets
• Incorporation of digital asset issuers into the regulatory framework
• Incorporation of digital asset platforms into the regulatory framework
• Prevention of illicit finance
• Prevention of corruption and abuse
• Ensuring fair and effective regulations

While some points within Democrats’ proposed framework are politically polarizing, the bipartisan nature of the digital asset legislation thus far suggests that future versions of this bill will incorporate some Democratic feedback. Winning over some Democrats is required, as at least 7 Democrats must support it to overcome Senate procedural hurdles. Signals thus far are optimistic for eventual passage – in response to the news of Democrats’ response, Senator Lummis responded favorably to the prospect of collaborating with Democrat colleagues on this legislation.

The timeline for final passage of market structure continues to shift, reflecting the need for reconciliation on differences of opinion within the Senate itself and between the Senate and House’s thought lines. However, the strong bicameral and bipartisan appetite to regulate the digital asset economy, also shared by the Trump administration, suggests that eventual passage remains likely.