FIT21 Bills ‘Watershed’ for Cryptocurrencies Despite CFTC-SEC Friction
FIT21 is the first digital asset bill in U.S. history to be passed by both houses of Congress (in this case, the House of Representatives).
We did so with strong bipartisan support. 71 Democrats joined 208 Republicans to pass the bill by a 2-1 margin.
“The overwhelming, bipartisan passage of FIT21 last week was symbolic. This shows that both parties are willing to work together and that Congress, not the SEC, should create policy,” Kristin Smith, CEO of the Blockchain Association, told Cointelegraph.
This also suggests that the political winds in Washington DC may be changing. “The cryptocurrency industry is more organized than ever and now has all the ingredients in place to advocate for smart policies,” Smith added.
In a press release on May 22, the U.S. House of Representatives Financial Services Committee described the passage of FIT21 as “a watershed moment for the U.S. digital asset ecosystem.”
Not only did FIT21 receive greater bipartisan support than its strongest supporters expected, but a third of House Democrats, including Speaker Nancy Pelosi, supported it.
However, this occurred almost simultaneously with the U.S. Securities and Exchange Commission’s (SEC) “change of heart on Ethereum,” Zach Zweihorn, partner at law firm Davis Polk, told Cointelegraph.
The agency approved an Ethereum spot market exchange-traded fund on May 23, a dramatic turnaround in itself.
Zweihorn also added that the May 16 Congressional Review Act vote is important to overturn Staff Accounting Bulletin 121, which “had 60 votes in the Senate, including prominent Democrats like Chuck Schumer.”
This will make it easier for highly regulated financial institutions and corporations to act as custodians of digital assets.
Dual Authority Encryption Regulations
However, one potential point of friction with FIT21 is its “dual agency” regulatory regime. Digital assets are regulated by the SEC or Commodity Futures Trading Commission (CFTC), depending on the decentralization of the underlying network or project.
Commodity regulators oversee decentralized assets such as Bitcoin (BTC), while the SEC may regulate tokens used to raise capital for new digital projects (such as ICOs), similar to traditional securities.
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“Having two regulators (SEC and CFTC) can cause confusion for market participants. We hope the Senate will look deeper into this issue as it drafts its own legislation,” Smith said.
While some have seen the benefits of a dual agency structure, this would further limit what they see as the SEC’s deterrent effect on cryptocurrency and blockchain innovation.
“FIT21 will help reduce some of the SEC’s authority over the cryptocurrency industry,” Kadan Stadelmann, Komodo’s chief technology officer, told Cointelegraph. “The SEC, currently led by Chairman Gary Gensler, has too much control, and its decision-making has hindered blockchain innovation in the United States.”
The bill’s framework “is a first step in saying that there must be a principle of limitation that limits (i.e. limits) the jurisdiction of the SEC. This is clearer than what we got from Chairman Gensler’s limitless, lawless approach to fintech,” he said. said policy analyst Jack Solowey. The Cato Institute’s Center for Currency and Financial Alternatives told Cointelegraph.
Of course, regulating digital assets is not an easy task. First of all, Matthew Le Merle, co-founder and managing partner of Blockchain Coinvestors, told Cointelegraph:
“As just one example, tokens can start out as a security and transform into a commodity as the network becomes decentralized.”
As another example, Polkadot’s native Polkadot (DOT) coin was “initially offered, sold, and passed on to purchasers as a security,” but later evolved, or “transformed, so that it is no longer a security; it is software,” according to the Web3 Foundation.
“The way the bill works, the same token could be both a restricted digital asset subject to SEC jurisdiction and a digital good subject to CFTC jurisdiction, depending on factors such as how it was acquired or who holds it. This creates a lot of complexity,” said Davis Polk’s Zweihorn.
For a token to fall under CFTC jurisdiction, the underlying project must be certified as a “decentralized system,” Zweihorn added. “There are very detailed and complex definitions of what constitutes a decentralized system, and some of the required elements can be ambiguous.”
The SEC is the agency that determines whether a system is decentralized through judicial review, Zweihorn added. Based on history, we can expect the SEC to continue to “take a very narrow view of what constitutes a decentralized system.”
Perhaps this is why not everyone in the cryptocurrency community celebrated the passage of FIT21. Cryptocurrency lawyer Gabriel Shapiro declared that the bill would give the SEC “great power” in regulating U.S. cryptocurrencies.
Nonetheless, “most cryptocurrencies are fundamentally considered commodities,” George Shakro, an attorney at Gordon Law, wrote on May 28. However, in order to remain a commodity under CFTC jurisdiction, a token must ~ no Must be under unilateral control of one person or entity for at least 12 months. Shakro added:
“If an individual or entity owns more than 5% of the total supply of an asset, it may instead be classified as a security.”
“If FIT21 becomes law, there will be a new legal test for ‘decentralization,’” Zweihorn added. Of course, this new test is open to a variety of interpretations, and “I suspect there will be a lot of disagreement when applied to specific assets.”
In any case, many people agree with Stadelmann that “we need some kind of comprehensive cryptocurrency regulation in the United States.” The European Union (EU), Switzerland, Singapore, and the United Arab Emirates are ahead. Due to unclear regulations, U.S. citizens have limited access to various cryptocurrency products and services. “This puts both cryptocurrency companies and users at a disadvantage.”
Politicians are listening to cryptocurrency holders
FIT21, on the other hand, is actually more of a framework than a completed blueprint for cryptocurrency oversight, and details can be negotiated later. Indeed, one of the big lessons from FIT21 is that American politicians who ignore cryptocurrencies are now doing so at their own peril.
Jake Chervinsky of Variant Funds, for example, argued that FIT21, which has strong support from Democrats, is “sending a message to the Biden administration that ‘anti-crypto’ is a losing platform this year.”
Perhaps such a claim is going too far?
“It doesn’t go far enough. America’s future depends on us taking a leadership position in a rapidly digitizing world. Most other countries are currently ahead of us in this respect,” said Le Merle. “(U.S. President Joe) Biden and (Senator Elizabeth) Warren’s so-called ‘anti-crypto group’ have acted in capricious and arbitrary, if not illegal, ways, seriously damaging American competitiveness and innovation.”
A recent Blockchain Coinvestors report predicted that digital asset regulation will be a key issue in the US elections for the first time in 2024. This is especially true among politicians trying to win the votes of digital natives.
“We have received tremendous support from our everyday users. The more than 50 million Americans who own or invest in cryptocurrencies are more active and vocal than ever before. It is clear that Washington is listening,” said Smith of the Blockchain Association.
The Cato Institute’s Solowey added: “It raises serious questions about the idea, at least among certain progressives, that anti-cryptocurrency stances will have a positive, not negative, impact on elections.”
Could FIT21 become law in 2024?
What are the chances that FIT21, or some form of it, will be signed into law in 2024, when there are US elections?
“Never say never, but given the limited time left on the legislative calendar in an election year, passing FIT 21 through the Senate this year would be a huge help,” Solowey said.
“There’s a pretty good chance it will pass,” Stadelmann said. “Polls show that Democrats are losing to Republicans in many key battleground states. “To win over independents, the Democratic Party has started to change direction and take a more cryptocurrency-friendly approach.”
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A recent poll from DCG and The Harris Poll found that one in five voters in swing states consider cryptocurrency a major issue in the election, Smith added.
Zweihorn said it may also be a good sign that President Biden has not threatened to veto the FIT21 bill, saying he is willing to work with Congress on a “comprehensive and balanced regulatory framework for digital assets.” “It may mean there is room for negotiation to find a workable legislative solution.”
Although FIT21 still faces an uphill climb in the Senate, overall “there certainly seems to be a wind of change,” Zweihorn said. But considering the recent 60 votes in the Senate on a resolution to disapprove SAB 121, “it’s not impossible.”
