FIT21: The Most Significant Crypto Regulation in US History?
As the cryptocurrency industry’s influence continues to expand, it becomes more important than ever to regulate the nascent industry correctly. With so much uncertainty surrounding what developers can do, the status of tokens as securities or commodities, and the safety of exchanges, proper government purview is needed to encourage innovation and protect companies from unforeseen risks. The Financial Innovation and Technology for the 21st Century Act (FIT21) is a step in the right direction for the crypto industry and the current best shot at proper American regulation.
Proposed by Congressman Glenn Thompson (R-PA), the FIT21 act is “an important step towards achieving regulatory clarity for digital assets” and aims to provide clarity for digital assets under U.S. law. It was introduced in July 2023, approved by the Financial Services and Ag committees in May 2024, and passed a vote in the House of Representatives on May 22nd with strong bipartisan support.
The FIT21 bill has various roles aimed at allowing digital assets to grow while ensuring consumer protection and safety. Following the FTX disaster, it imposes strict rules on crypto service providers and transparency requirements. It will also introduce a decentralization test to determine if assets are commodities or securities, which will be determined by whether an entity with “unilateral authority” over the blockchain or over 20% of the asset exists. If one is a commodity, it will be regulated by the CFTC. Otherwise, it will fall under the SEC’s purview. The bill acknowledges the dynamic status of digital assets by adding a path for cryptocurrencies to commoditize over time as decentralization improves.
On the Bankless Podcast, House Financial Services Chair Patrick McHenry said they have put many cryptos through the decentralization test and rigorously experimented to ensure it is fair and accountable. Under it, Ethereum would pass as a commodity. McHenry also mentioned that the political divide on crypto is less party-based and more age-based, with younger politicians and those who recently won elections more educated on it and aware of its role in society.
The most significant outcome of this bill would be giving protocols and companies clarity about what they can and cannot do. For example, protocol fee switches have been a hotly debated topic — is it legal to distribute protocol fees back to token holders or would this make the asset a security? Uniswap has faced this challenge firsthand by being criticized for not turning on the fee switch, then making strides towards enabling it, and immediately getting sued by the SEC for acting as an unlicensed brokerage. Even if the law ultimately decides that fee switches make an asset a security, the clarity would allow protocols to work around it or redefine their value capture mechanism. The law also provides protections for companies like Coinbase and Kraken, who may be selling assets that are now commodities but were offered in investment contracts, making them previously involved in securities transactions. It excludes DeFi protocols, a massive victory for decentralized protocols and the future of onchain finance. Permitted stablecoins are exempt from CFTC and SEC regulations and will likely be covered by an additional bill.
As expected, the SEC has criticized the bill for creating a regulatory gap, arguing that the Howey Test is the only test required to label an asset as a security or commodity. They are concerned about the bill’s broad wording and inability to correctly and efficiently classify the 16,000+ digital assets.
With the House’s passage, a Senate vote is next, but no date is set for the vote. A similar bill, the Lummis-Gillibrand crypto bill, exists in the Senate, so common ground needs to be found between the two. Nonetheless, the bipartisan passage of such a crypto-friendly bill is incredibly positive for the industry’s growth in the United States.
By Lincoln Murr
