NASAA-Backed Letter Warns RFIA Could Weaken Investor Protections in Crypto Regulation
A bipartisan group of 28 academic leaders in securities and financial regulation – including representatives from Stanford University, George Washington University Law School, and Notre Dame Law School – has issued a letter to Congress calling for the removal of provisions within the Responsible Financial Innovation Act of 2025, or RFIA. They argue the legislation would dismantle vital investor protections and hinder regulators’ ability to combat fraud.
The letter was organized and endorsed by the North American Securities Administrators Association, which transmitted the letter to Congress with its own formal cover note. NASAA, which represents state and provincial securities regulators across the United States, Canada and Mexico, has voiced strong opposition to the RFIA’s redefinition of securities law and its impact on state enforcement authority.
Addressed to Senate Banking Committee Chairman Tim Scott (R-S.C.) and Ranking Member Elizabeth Warren (D-Mass.), the letter explicitly warns that the bill, as currently written, “would undermine well-settled principles of securities regulation, making it more difficult for regulators to stop online scams and other investment frauds.”
The RFIA draft legislation aims to create a clear federal regulatory framework for digital assets, including cryptocurrencies. While proponents argue the bill provides necessary regulatory clarity for innovation, the academic critics contend it achieves this at the expense of crucial investor safeguards, particularly by weakening the established power of state securities regulators.
The RFIA is currently in the discussion draft stage within the U.S. Senate and has not been formally introduced or passed. These concerns come as Congress works to reconcile the Senate’s forthcoming legislation with the House’s Digital Asset Market Clarity Act of 2025 (H.R. 3633), which passed earlier this year.
The scholars identified three major areas of concern in the RFIA’s current draft:
Redefining the Investment Contract Test
The most critical opposition is directed at Section 105, which proposes a new definition for the investment contract test. The Howey test (currently rooted in the Howey Supreme Court case) is the primary legal tool used by both federal and state regulators to determine if a new product, especially a digital asset, qualifies as a “security.”
During a summer symposium, Paul Atkins, chairman of the U.S. Securities and Exchange Commission said that most crypto assets are not securities, and should be classified as such.
The proposed changes within RFIA introduce new requirements that critics say might create loopholes for fraudsters. These include: mandating that a violation only exists if investors lose more than a minimum amount of money; and excluding “ministerial, technical, or administrative” profit-making efforts from consideration. The letter’s authors argue these ambiguities would be “good for bad actors,” allowing fraudsters pushing scams like pig butchering, Ponzi schemes, and fraudulent promissory notes to exploit the new standards and evade prosecution.
Weakening State Licensing and Registration
The letter strongly urges Congress not to dilute the existing state laws that govern the registration and licensing of securities firms and professionals.
State licensing programs act as critical gatekeepers, according to the academics, ensuring professional conduct standards are met and screening out unscrupulous individuals from the marketplace. They also provide the public with access to essential background information on firms. The authors argue that undermining these state safeguards removes an important layer of defense for retail investors.
Compromising State Anti-Fraud Authority
Finally, the academic leaders demand that Congress explicitly preserve the existing anti-fraud enforcement authority of state securities regulators. State regulators have been on the “front lines” of investor protection for over a century and have recently dedicated significant resources to combatting the modern epidemic of online scams that have cost Americans billions.
The scholars caution that even if Congress doesn’t intend to interfere with state authority, the high stakes of investor fraud require explicit language to ensure states “remain an integral part of the U.S. response to online scams moving forward.”
“Investors deserve no less,” concludes the letter, calling on Congress to abandon the effort to redefine investment contracts, maintain state registration and licensing guardrails, and protect existing state anti-fraud authority.
Implications for Alternative Investments
The proposed changes could directly affect firms offering tokenized alternative investments or structured digital products. By narrowing the definition of a security and limiting state oversight, the legislation may introduce regulatory uncertainty and weaken protections for investors transacting in novel or lightly supervised investment vehicles.
The legislation is being advanced by Republican members of the Senate Banking Committee, including Scott, and Senators Cynthia Lummis (R-Wyo.), Bill Hagerty (R-Tenn.), and Bernie Moreno (R-Ohio). An updated, extensive discussion draft was released on Sept. 5, 2025.
If passed, the Senate version of RFIA would need to be reconciled with the CLARITY Act before reaching the president’s desk.
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