Source: TaxDAO
On May 22, 2024, the United States House of Representatives approved an important crypto bill called the “21st Century Financial Innovation and Technology Act” (FIT21), marking a significant step towards achieving regulatory clarity in the crypto industry. The FIT21 bill aims to clearly define cryptocurrencies, classify specific cryptocurrencies to determine whether they are securities or commodities, and decide which government agency will regulate them. The proposed crypto bill will now be put to a vote in the United States Senate.
What is the FIT21 cryptocurrency bill? Let’s take a closer look.
1. About the “21st Century Financial Innovation and Technology Act” (FIT21)
The FIT21 bill is a consumer protection bill aimed at establishing a regulatory framework for digital assets.
The bill seeks to protect consumers while ensuring that crypto innovators are not subject to erroneous enforcement actions by regulatory agencies such as the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) due to “lack of clear rules.”
The committees stated, “FIT21 provides robust, time-tested consumer protection and necessary regulatory certainty, which is essential for the thriving of digital asset innovation in the United States.”
The bill introduces a “decentralization test” to determine whether a cryptocurrency is a security or a commodity. The SEC will regulate digital asset securities, while the CFTC will regulate digital asset commodities.
The FIT21 bill is the result of the joint efforts of the House Financial Services Committee and the House Agriculture Committee, and it was first introduced to the U.S. House of Representatives in July 2023.
On May 21, 2024, U.S. Congressman French Hill stated during a House session, “Without clear rules, we will continue to see the SEC pursue an enforcement agenda that makes market participants worry about litigation if they continue to operate in the United States.”
2. What is the role of the FIT21 bill?
The FIT21 bill aims to achieve the following four key objectives:
Consumer protection requirements – The bill aims to enforce strict consumer protection for crypto service providers, including disclosure of information, fund segregation, capital requirements, and higher custody standards.
Defining the authority of the CFTC and SEC – The bill will clearly define whether cryptocurrencies are securities or commodities, allowing the CFTC to regulate crypto commodities and granting the SEC the authority to regulate crypto securities.
Allowing crypto projects to transition from centralized to decentralized – The bill will allow crypto tokens to become decentralized over time, turning them into a commodity.
Supporting crypto innovation in the United States – The bill will provide clear regulatory guidelines for the digital asset ecosystem, allowing crypto companies and startups to innovate without fear of litigation.
3. Decentralization test of FIT21 – Crypto securities or crypto commodities?
Here’s how the FIT21 bill will determine that a cryptocurrency is sufficiently decentralized to be classified as a commodity: “In addition to other requirements, if no one has unilateral control or use of the blockchain, and there is no issuer or affiliate controlling 20% or more of the voting power of the digital asset, the bill will classify the blockchain as decentralized.”
The Bankless Podcast stated during an interview that the “decentralization test” of the FIT21 bill has been “continuously improved through extensive feedback.” Congressman McHenry added that the decentralization test is a “very clear test” that allows crypto projects to determine whether the tokens they issue are classified as securities or commodities.
Furthermore, McHenry stated that the concept of centralization and decentralization is a “broad spectrum,” and the degree of decentralization of Bitcoin (BTC) is at one end of the spectrum. Regarding Ethereum (ETH), McHenry indicated that Ethereum has “clearly” passed FIT21’s decentralization test, making it a crypto commodity.
4. SEC’s response to FIT21
Despite what you may think is the safest prediction in the crypto space, U.S. Securities and Exchange Commission Chairman Gary Gensler does not like the FIT21 bill.
On May 22, 2024, Gensler fiercely criticized the proposal in a blog, stating that the FIT21 bill could create new regulatory loopholes, putting investors and the capital markets at risk. Gensler added that the decentralization test of the FIT21 bill abandons the “long-standing Howey test” of the Supreme Court and allows crypto projects to self-certify as “decentralized” to evade SEC oversight.
He also stated that the U.S. Securities and Exchange Commission would not have enough manpower to handle the digital commodity certification requests for the current 16,000+ crypto assets.
“What if the troublemakers of the pump and dump schemes tag themselves with crypto investment contracts or self-certify as decentralized systems to argue they are not subject to securities laws? The SEC only has 60 days to challenge their self-certification,” Gensler pointed out.
5. Conclusion
The FIT21 bill still has a long way to go before becoming law, as the United States Senate will vote on the bill next. If approved, the crypto bill will return to the House and Senate for final approval.
Once approved, the president will have ten days to sign or veto the bill. The Biden administration released a statement expressing opposition to the “current form” of the FIT21 bill but “eager to work” to ensure a balanced regulatory framework for cryptocurrencies. However, the Biden administration has not made any veto statements regarding the bill.
