With the growing influence of the cryptocurrency industry, it has become more important than ever to regulate this emerging industry. There is a lot of uncertainty surrounding what developers can do, the status of tokens as securities or commodities, and the security of exchanges. Appropriate government authority is needed to encourage innovation and protect companies from unforeseen risks. The Financial Innovation and Technology Act of the 21st Century (FIT21) is a step in the right direction for the cryptocurrency industry and the best opportunity to change the perception of “enforcement regulation” in the industry.
FIT21, introduced by Congressman Glenn Thompson (R-PA), is touted as “an important step towards achieving regulatory clarity for digital assets.” The bill was proposed in July 2023 and approved by the Financial Services and Agriculture Committee in May 2024, receiving strong bipartisan support in the House of Representatives on May 22.
FIT21 has multiple purposes, aiming to facilitate the growth of digital assets while ensuring consumer protection and security. It imposes strict regulations on cryptocurrency service providers and transparency requirements following the FTX bankruptcy case. It also introduces decentralized tests to determine whether assets are commodities or securities, based on whether there is a “unilateral power” over the blockchain or if any entity owns more than 20% of the assets.
If classified as commodities, they will be regulated by the Commodity Futures Trading Commission (CFTC). Otherwise, they will fall under the jurisdiction of the Securities and Exchange Commission (SEC). The bill acknowledges the dynamic nature of digital assets and provides a pathway for the gradual commodification of cryptocurrencies as decentralization increases.
During the Bankless Podcast, Congressman Patrick McHenry, Chair of the Financial Services Committee, stated that they have conducted decentralized tests on many cryptocurrencies and conducted rigorous experiments to ensure fairness and reliability. Under the decentralized test, Ethereum is considered a commodity.
Patrick McHenry also mentioned that the political divide on cryptocurrencies is not based on parties but on age. Younger politicians and those who recently won elections have a better understanding of cryptocurrencies and recognize their role in society.
The most important outcome of this bill is to provide clarity for protocols and companies on what they can and cannot do. For example, the question of protocol fees has always been a topic of debate – whether it is legal to return protocol fees to token holders or if it would make the asset a security. Uniswap has been troubled by this definition, initially facing community criticism for not enabling fee switching, but immediately facing a lawsuit from the SEC for operating as an unlicensed broker-dealer after enabling it. Even if the law ultimately determines that fee switching makes an asset a security, this clarity will allow protocols to work around it or redefine their value capture mechanisms. The law also provides protection for companies like Coinbase and Kraken and excludes DeFi protocols, which is a huge victory for the future of decentralized protocols and on-chain finance.
As expected, the SEC criticized the bill for creating regulatory loopholes and insisted that the Howey test is the only way to classify assets as securities or commodities. They are concerned that the wording of the bill is too broad to effectively classify over 16,000 different digital assets.
After passing the House, the bill will be voted on in the Senate, but the voting date has not been determined. The Senate also has a similar bill, the Lummis-Gillibrand Crypto Bill, with significant differences in specific details. Nevertheless, bipartisan support for a bill that truly benefits the cryptocurrency industry has a highly positive impact on the industry’s development and innovation in the United States.
Author: BitpushNews Lincoln Murr