Many regulators see the crypto industry as the Wild Wild West with rampant fraud and illicit transactions. But instead of working with the industry to create clear rules and regulations, the Securities and Exchange Commission (SEC) has relied on enforcement actions.
The agency asserts that almost all cryptocurrencies—with the exception of Bitcoin—are securities. Since 2014, it has brought more than 100 enforcement actions against crypto exchanges and projects issuing or selling tokens without registering them.
Many politicians have come to see digital assets as a new frontier where the U.S. could lead innovation. With regulators applying decades-old laws to the nascent industry, some have sought to provide regulatory clarity and limitations through new laws.
In May 2024, the House of Representatives passed the Financial Innovation and Technology for the 21st Century (FIT21) Act. The bipartisan legislation would define how regulators should treat crypto assets and support long-term innovation in the space.
This article examines the House bill’s contents, reactions from regulators and industry participants, how it may impact the crypto industry, and what’s next before it is signed into law.
What the Laws Says
The Financial Innovation and Technology for the 21st Century (FIT21) Act provides the Commodity Futures Trading Commission (CFTC) with the authority to regulate digital assets as commodities—rather than securities—if the blockchain is functional and decentralized.
In particular, the bill classifies a blockchain as decentralized if, among other requirements, no person has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person controls more than 20% of the digital asset or voting power.
Classifying crypto assets as securities versus commodities depends on the market participants and decentralization. Source: CoinDesk
On the other hand, the bill provides the Securities and Exchange Commission (SEC) with authority to regulate digital assets as securities if the associated blockchain is functional but not decentralized—or, in other words, operates more like a stock.
The bill also establishes certain exceptions to SEC regulation for digital assets that limit annual sales, restrict non-accredited investor access, and satisfy disclosure and compliance requirements. And it sets requirements for primary and secondary markets.
Finally, the bill seeks to protect consumers by requiring accurate disclosures, segregating customer funds, and reducing conflicts of interest.
Reactions to the Law
Gary Gensler, the Chair of the Securities and Exchange Commission, recently issued a statement opposing the Financial Innovation and Technology for the 21st Century Act.
Gensler believes the bill would create new regulatory gaps and undermine decades of precedent regarding overseeing investment contracts. In particular, he notes that the courts have ruled in the SEC’s favor in numerous cases using the long-standing Howey test.
Moreover, the bill allows crypto issuers to self-certify that their products are decentralized, giving the SEC only 60 days to challenge the certification. With over 16,000 crypto assets, Gensler says the agency lacks the staff to meet the demands.
Finally, Gensler argues that the bill’s crypto exemptions would undermine Regulation A, Regulation D, and other securities laws since issuers could switch from conventional securities to cryptocurrencies to avoid reporting requirements.
The CFTC did not issue a statement in response to the bill.
The Potential Impact
The Financial Innovation and Technology for the 21st Century Act could enormously impact the crypto industry.
The new law could spur larger companies to pursue their crypto ambitions by eliminating regulatory uncertainty. For example, large companies may launch their own blockchain ecosystems without worrying about the registration requirements for tokens, which could create a much more vibrant and active crypto ecosystem.
The exemption of crypto asset trading systems from the definition of an exchange could similarly open the door to more decentralized finance innovation. In addition, it would eliminate the uncertainty surrounding crypto exchanges, like Coinbase, and product offerings, like staking tokens to earn returns.
But there are also possible downsides.
The current bill would create a bifurcated market for crypto tokens, with some “restricted digital assets” and others “digital commodities.” In the inherently fungible crypto markets, these could create unique compliance challenges. Concurrent trading in both markets could result in a lot of confusion for all market participants.
The bill could also give the SEC authority over a new crypto project before it reaches the decentralization threshold. In fact, only earned or airdropped tokens would be “digital commodities” from the onset. These dynamics could actually incentivize early development to occur outside of the U.S., running counter to innovation goals.
What’s Next?
The Financial Innovation and Technology for the 21st Century (FIT21) Act will move onto the Senate, where it will go through a similar process as in the House. Generally, it’s referred to the appropriate Senate committee(s) for review, hearings, and amendments. If the committees approve, they will place it on the Senate calendar for a debate and vote.
If there’s a difference between the House and Senate versions, a conference committee of members from both chambers will reconcile the differences and create a single bill passed back to the Senate and House for a final vote.
If the House and Senate pass the same version of the bill, it’s passed to the President, who may opt to sign it, veto it, or do nothing (where it automatically becomes law unless there’s a pocket veto). For its part, the White House does not support the bill but hinted that it would not veto it if passed.
The Bottom Line
The Financial Innovation and Technology for the 21st Century Act joins several crypto bills that have passed the House of Representatives, but its fate in the Senate will be its real test. While the bill saw bipartisan support in the House, regulatory opposition and a lack of political support from the White House threatened to derail the effort.
Of course, classifying crypto assets as securities rather than commodities is just one of many regulatory uncertainties. The tax laws surrounding crypto assets remain uncertain in many areas. For instance, the IRS hasn’t provided clear guidance on whether using a crypto bridge qualifies as a taxable event.
Fortunately, a growing number of politicians recognize these deficiencies in the law and are taking action to attempt legislative fixes rather than relying on enforcement actions.
If you trade crypto assets, ZenLedger can help you comply with another regulatory agency—the IRS. Our platform automatically aggregates transactions across your wallets and exchanges, computes your capital gain or loss, and generates the tax forms you must file. You can even find ways to harvest tax losses and lower your year-end tax bill!
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
