FIT 21, a legislative plan aimed at clarifying the role of different regulatory agencies in overseeing the crypto industry, may have a tough road ahead, but its details are worth considering.
Far from their initial fringe existence, cryptocurrencies have become a powerful presence in American political and financial life, with approximately 40% of American adults holding some form of cryptocurrency. Indeed, recent reports have noted that cryptocurrency companies have accounted for nearly half of all corporate donations during the 2024 presidential election so far.
Unsurprisingly, lawmakers in Washington are taking notice. On May 22, the U.S. House of Representatives passed the Financial Innovation and Technology Act for the 21st Century Act (FIT 21), a major step toward productive regulation of the cryptocurrency industry. Understanding the contours of FIT 21 is valuable and helpful, even as the bill takes an uncertain legislative path.
This article was written for the Thomson Reuters Institute blog by Samidh Guha, Sophia Kielar and David Rosa of Guha Law Firm PLLC.
The FIT 21 bill didn’t come out of nowhere. The bill is the result of considerable effort by various stakeholders in the cryptocurrency industry, including lawmakers, industry participants, and interested financial institutions. Cryptocurrency industry lobbyists lobbied for FIT 21 on Capitol Hill, and the bill has been publicly supported by leading voices in the industry, including Coinbase, The Block, and Digital Currency Group. FIT 21 would be a response to criticism from the cryptocurrency industry that the government has thus far pursued regulation of digital currencies without providing sufficient guidance to provide market participants with rules of conduct.
If passed, FIT 21 would provide a clearer set of tests for determining whether a cryptocurrency is a security or a commodity. In making this critical decision, the bill aims to more clearly define jurisdiction over cryptocurrencies among regulators, strengthen consumer protections, and clarify compliance obligations. Notably, FIT 21 proposes to extend the requirements of the Bank Secrecy Act (BSA) to the crypto sector, providing BSA reporting and compliance procedures for crypto products that have been unclear until now.
A FIT 21 preview
The FIT 21 bill separates digital assets into three categories: digital commodities, restricted digital assets, and permitted payment stablecoins. However, it only enacts substantive guidelines and regulations for the first two. The FIT 21 bill assigns regulatory authority over digital commodities and the market participants that trade them to the U.S. Commodities Futures Trading Commission (CFTC). In contrast, the bill assigns regulatory authority over restricted digital assets to the U.S. Securities and Exchange Commission (SEC).
Digital raw materials
FIT 21 defines an asset as a digital merchandise based on an assessment of decentralization. Under the proposed legislation, an asset must be submitted to the SEC for certification to determine whether the asset can be considered sufficiently decentralized and functional. Decentralization, for purposes of FIT 21, is measured by an assessment of equity ownership, voting power, controlling authority over the functionality of the blockchain, recency of changes to the source code, and recency of public marketing of the digital asset as an investment.
The SEC has 60 days to review the application and either accept the asset as a digital commodity or reject the application. If an asset is approved as a digital commodity, it must then be registered with the CFTC. If the SEC disagrees that a blockchain is functional or decentralized, the agency must issue a rebuttal notice with a detailed analysis of the factors used to conclude its opposing view. Rebuttals can be appealed to a federal appeals court.
Once the SEC certifies that a cryptocurrency’s blockchain is functional and decentralized, the digital asset becomes a digital commodity for regulatory purposes. However, before that digital commodity can be offered on a trading platform, it must also be certified by the CFTC.
Restricted digital assets
Cryptocurrencies considered as securities under FIT 21 are called restricted digital assets. The SEC has made clear in its public comments and regulatory actions that many digital assets are securities. Designating restricted digital assets under FIT 21 would give the agency a legislative foothold for its long-standing desire to regulate the space. Unlike digital commodities, restricted digital assets and associated market participants regulated by the SEC will have more stringent reporting and disclosure requirements, as is the case for SEC-regulated industries and assets.
FIT 21 limits the scope of the SEC. FIT 21 would restrict the application of the federal security definition of digital assets excluding investment contract assetswhich would have the effect of removing many digital assets from the scope of federal securities laws. In doing so, FIT 21 would significantly limit the SEC’s jurisdiction in this area.
Weakness of FIT 21
The FIT 21 legislation, as currently drafted, is not without its flaws. For example, while the SEC has 60 days to respond to requests for certification of decentralization under the law, it seems unlikely that such a short deadline would be feasible in practice.
Moreover, one of the flaws of the FIT 21 framework is that, while it assigns regulatory powers to the SEC and CFTC as opposed to other agencies or the U.S. Treasury Department, the delineation of powers between the CFTC and SEC may in practice be increasingly difficult. For example, staked digital assets—crypto assets locked for a set period of time, typically used to support blockchain operations in the hope of being able to earn more crypto assets once the lockdown expires — are not explicitly mentioned in the bill. Therefore, it is unclear where exchanges that offer staking or blockchains that use staking for governance voting rights fall within the dual jurisdiction, or whether they fall within it at all.
Commentators also noted that the FIT 21 definition digital asset excludes the phrase “any note.” As such, the SEC could claim that the assets at stake are Remarksbut the underlying asset, such as Ethereum or a stablecoin, could be considered a commodity. This could create a regime in which a given cryptocurrency can be both a digital merchandise and one restricted digital assetand therefore possibly subject to two different regulatory requirements.
FIT 21’s proposed solution to this dual regulatory jurisdiction is to require the SEC and CFTC to develop joint rules that specify how an entity can register with both agencies. However, skepticism about harmonious joint regulation is warranted, as the two agencies have resisted previous calls for rulemaking and have engaged in a years-long turf war over cryptocurrency jurisdiction. In fact, some market participants have targeted FIT 21 for splitting jurisdiction between the two regulatory agencies.
Conclusion
While the FIT 21 bill is promising and an important step toward a substantive framework for regulating and growing cryptocurrencies in the United States, its future is uncertain. The proposed bill has yet to be scheduled for a vote in the Senate, and it is uncertain whether it will happen before the end of the year or under the next administration. The upcoming federal elections in November could also spur regulatory efforts in the sector.
In its current form, the FIT 21 bill promises to create a regulatory framework that more clearly delineates when a cryptocurrency is defined as a security and when it is defined as a commodity, as well as outline compliance and reporting procedures and allocate resources to enforce the regulations. While the proposed bill has its flaws, FIT 21 moves us one step closer to the goal of creating a meaningful and effective regulatory regime for the cryptocurrency industry that does not stifle innovation or leave investors unprotected.
