What is FIT21 Cryptocurrency Act — and why it matters

Source: TaxDAO

The U.S. House of Representatives approved an important crypto bill called the 21st Century Financial Innovation and Technology Act (FIT21) on May 22, 2024, marking an important step towards achieving regulatory clarity in the crypto industry in the United States. The FIT21 bill aims to clearly define cryptocurrencies, classify specific cryptocurrencies to determine whether they are securities or commodities, and decide which government agency will regulate them. The crypto bill proposal will next be sent to the U.S. Senate for a vote.  

What is the FIT21 Cryptocurrency Act? Let’s take a look. 1. About the Financial Innovation and Technology Act for the 21st Century (FIT21) The FIT21 Act is a consumer protection bill that aims to establish a regulatory framework for digital assets. The bill aims to protect consumers while ensuring that crypto innovators are not wrongly prosecuted by regulators such as the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) due to a “lack of clear rules.”  

The committee said: "FIT21 provides strong, time-tested consumer protections and necessary regulatory certainty that are essential for digital asset innovation to flourish 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 Act is the result of a joint effort between the House Financial Services Committee and the House Agriculture Committee and was first introduced to the U.S. House of Representatives in July 2023.  

On May 21, 2024, U.S. Congressman French Hill pointed out at a meeting in the House of Representatives that "without clear rules, we will continue to see the SEC pursue an 'enforcement regulation' agenda, which makes market participants worry that if they continue to operate in the United States, they will face lawsuits at any time." 

2. What is the role of the FIT21 Act?  

The FIT21 Act seeks to achieve the following four key objectives: 

• Consumer Protection Requirements – The bill seeks to impose strict consumer protections on crypto service providers, including disclosure, segregation of funds, capital regulations, and higher custody standards.  

• Defines the purview of the CFTC and SEC - The bill would clearly define whether cryptocurrencies are securities or commodities, allowing the CFTC to regulate crypto commodities and giving the SEC regulatory authority over crypto securities.  

• Allow crypto projects to evolve from centralization to decentralization - The bill would allow crypto tokens to decentralize over time and become a commodity.  

• Support cryptocurrency innovation in the United States - The bill would provide regulatory clarity for the digital asset ecosystem, enabling cryptocurrency companies and startups to innovate without fear of litigation.  

3. FIT21’s decentralized test - crypto-security or crypto-commodity? Here’s how FIT21 would determine that cryptocurrencies are decentralized enough to be classified as commodities: “Among other requirements, the bill would classify a blockchain as decentralized if no one person has unilateral control or power to use the blockchain and no issuer or affiliate controls 20% or more of the voting power of the digital asset.” Bankless Podcast told CNBC that FIT21’s “decentralization test” has been “refined through a lot of feedback.” Rep. McHenry added that the decentralization test is a “very clear test” that allows crypto projects to determine whether the tokens they issue are classified as securities or commodities. In addition, McHenry said that the concepts of centralization and decentralization are a “broad spectrum” and that Bitcoin (BTC) is at one end of the spectrum. Regarding Ethereum (ETH), McHenry said that Ethereum “clearly” passes FIT21’s decentralization test, making it a crypto commodity.  

4.SEC’s response to FIT21 

Although you might think this is the safest prediction in the cryptocurrency space, SEC Chairman Gary Gensler doesn’t like the FIT21 bill.  

On May 22, 2024, Gensler slammed the proposal in a blog post, saying that the FIT21 bill could create new regulatory loopholes that would put investors and capital markets at risk. Gensler added that the FIT21 bill’s decentralization test abandons the “long-standing Supreme Court Howey test” and allows crypto projects to self-certify as “decentralized” to evade SEC oversight. He also said the SEC would not have enough staff to handle digital commodity certification requests for the more than 16,000 crypto assets that currently exist.  

“What if pump and dump scheme perpetrators and penny stock promoters argue that they are not subject to securities laws by labeling themselves as crypto investment contracts or self-certifying that they are decentralized systems? 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 it becomes law, with the U.S. Senate set to vote on the bill next. If passed, the crypto 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 saying it opposes the FIT21 bill in its "current form" but is "eager to work" to ensure a balanced regulatory framework for cryptocurrencies. But the Biden administration did not make any veto statements on the bill.