Source: TaxDAO
On May 22, 2024, the United States House of Representatives approved a significant cryptocurrency bill called the 21st Century Financial Innovation and Technology Act (FIT21), marking an important step towards achieving regulatory clarity in the cryptocurrency industry. The FIT21 bill aims to clearly define cryptocurrencies, categorize specific cryptocurrencies to determine whether they are securities or commodities, and decide which government agency will regulate them. The proposed cryptocurrency bill will now be sent to the United States Senate for a vote.
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 cryptocurrency innovators are not subject to incorrect prosecution by regulatory agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) due to “lack of clear rules.”
The committee stated, “FIT21 provides strong, time-tested consumer protection and necessary regulatory certainty, which is essential for the vibrant development of digital asset innovation in the United States.”
The bill will introduce 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 joint efforts by 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 pointed out during a House meeting, “Without clear rules, we will continue to see the SEC pursuing an ‘enforcement agenda,’ which concerns market participants who fear lawsuits if they continue to operate in the United States.”
2. What is the role of the FIT21 bill?
The FIT21 bill aims to achieve four key objectives:
Consumer protection requirements – The bill aims to implement strict consumer protection for cryptocurrency service providers, including disclosure of information, fund segregation, capital requirements, and higher custody standards.
Defining the scope of the CFTC and SEC – The bill will clearly define whether cryptocurrencies are securities or commodities, allowing the CFTC to regulate cryptocurrency commodities and granting the SEC the authority to regulate cryptocurrency securities.
Allowing cryptocurrency projects to transition from centralized to decentralized – The bill will allow cryptocurrency tokens to decentralize over time and become a commodity.
Supporting cryptocurrency innovation in the United States – The bill will provide clear regulatory provisions for the digital asset ecosystem, allowing cryptocurrency companies and startups to innovate without fear of litigation.
3. The decentralization test of FIT21 – Cryptocurrency Security or Commodity?
Here’s how the FIT21 bill will determine when 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 associated person controlling more than 20% of the voting rights of the digital asset, the bill will classify the blockchain as decentralized.”
The Bankless Podcast stated in 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 cryptocurrency projects to determine whether the tokens they issue are classified as securities or commodities.
Furthermore, McHenry stated that the concepts of centralization and decentralization are a “broad spectrum,” and that Bitcoin (BTC) is at one end of the spectrum in terms of decentralization. Regarding Ethereum (ETH), McHenry indicated that Ethereum has “clearly” passed the decentralization test of FIT21, making it a type of cryptocurrency commodity.
4. SEC’s Response to FIT21
Despite what you may think is the safest prediction in the cryptocurrency field, the Chairman of the U.S. Securities and Exchange Commission, 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, exposing investors and capital markets to risks. Gensler added that the decentralization test of the FIT21 bill abandons the “longstanding Howey test” of the Supreme Court and allows cryptocurrency projects to self-certify as “decentralized” to evade SEC supervision.
He also stated that the U.S. Securities and Exchange Commission will not have enough manpower to handle the digital commodity certification requests for the current 16,000+ existing cryptocurrencies.
“What if the culprits of pump-and-dump schemes and penny stock promoters label themselves as cryptocurrency investment contracts or self-certify that they are part of a decentralized system to argue that they are not bound by 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 passed, the cryptocurrency 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 issued a statement opposing the “current form” of the FIT21 bill but “eager to work” to ensure a balanced regulatory framework for cryptocurrency. However, the Biden administration has not made any veto statement regarding the bill.