FIT21 would provide regulatory certainty for the US digital asset ecosystem, balancing support for innovation with consumer protection.

On May 22, 2024, the US House of Representatives (the House) passed H.R. 4763, the Financial Innovation and Technology for the 21st Century Act (FIT21), with a good measure of bipartisan support: 279 votes in favor (208 Republicans and 71 Democrats) and 136 votes opposing (three Republicans and 133 Democrats).

FIT21 would create a regulatory regime for the digital asset industry apportioning regulatory authority with respect to digital assets between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), and clarifying the respective jurisdictions of the two agencies. The CFTC would be granted plenary authority over spot market digital asset commodities, while the SEC would maintain authority over restricted digital assets (i.e., digital assets that constitute securities).

FIT21 was first introduced on July 20, 2023, by Chairman Glenn “GT” Thompson, Representative French Hill, Representative Dusty Johnson, Majority Whip Tom Emmer, and Rep. Warren Davidson. Rep. Patrick McHenry, Chairman of the House Financial Services Committee, has also been a vocal proponent of FIT21.

Key Provisions of FIT21

CFTC and Commodities

• Jurisdiction: The CFTC would receive exclusive regulatory jurisdiction over “digital commodities,” with certain market intermediaries and trading venues in digital commodities required to register with the CFTC.
• Decentralization: The bill would classify a blockchain as a “decentralized system” if, among other requirements, no person has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person has control of 20% or more of the digital asset or the voting power of the digital asset. A token issuer would be able to petition the SEC for its restricted digital asset to be considered a digital commodity as long as the issuer self-certifies that the network is functional and decentralized and the SEC does not object to the certification within 60 days.[1]
• New CFTC Registrants: A Digital Commodity Exchange (DCE) regulatory regime would be established for the trading of digital commodities. Further, FIT21 would establish a Digital Commodity Broker (DCB) and a Digital Commodity Dealer (DCD) registration framework. DCBs and DCDs would be required to register with a registered futures association and meet prescriptive business conduct requirements related to reporting; recordkeeping; anti-fraud, manipulation, and other abusive practices; supervision; conflicts of interest; and segregation of customer assets.

• Trading in Digital Commodities: Under the bill, digital commodities would be tradeable on CFTC-regulated exchanges or through regulated registrants. However, the digital commodity may still be subject to restrictions for issuers and other insiders.
• Secondary Sales: Digital commodities would be permitted to be traded in secondary sales even after initially being sold as investment contracts, if certain conditions are met (such as certified and publicly available enhanced disclosure requirements related to the digital asset’s blockchain network). The Securities Clarity Act, included in FIT21, would establish that certain fungible digital assets do not automatically qualify as “securities” simply because they were initially sold or transferred pursuant to an investment contract.
• Stablecoins: Payment stablecoins would be expressly excluded from the definition of digital commodity. However, DCEs would be permitted to list them and DCBs and DCDs would be permitted to trade them. If transactions in payment stablecoins were conducted by or on a CFTC-registered entity, they would be regulated as if they were digital commodities.
• Anti-Fraud and Anti-Manipulation Authority: The CFTC’s existing anti-fraud and anti-manipulation authority in spot commodity markets would extend to digital commodities.
• Consumer Protection: Customer protection obligations would be imposed on all entities that register with the CFTC.
• Filing Fees: Any entity that files intent to register as a digital commodity exchange would be required to pay a filing fee of $800,000 and, in the case of a notice of intent to register as a digital commodity broker or a digital commodity dealer, $400,000. Entities maintaining their registration status with the CFTC would be required to pay the same amount noted as an annual fee. Termination fees would be double the amount noted.
• CFTC Funding: Fees collected from registrants would be allocated to the CFTC to carry out its functions under FIT21 (without further congressional appropriation), up to the lesser of the total amount needed, or $40 million. If the CFTC collects more than the maximum permitted, it is required to reimburse the excess amount to the persons who have timely paid their annual fees, on a pro-rata basis.

SEC and Securities

• Jurisdiction: The SEC would maintain jurisdiction over “restricted digital assets” (i.e., securities). However, as defined under the Securities Clarity Act of 2024 (first discussed above in Secondary Sales), the term “security” would be amended in the securities laws to exclude an “investment contract asset,”[2] such that any asset sold as the object of an investment contract would be considered distinct from the securities offering of which it initially formed part. An end user would be permitted to trade a digital asset, and the transaction “shall not be atransaction in an investment contract,” if “each blockchain system to which such digital asset relates is a functional system,” and certain disclosures regarding that blockchain system are certified and made publicly available.
  • SEC Chair Gary Gensler bristled at the potential ramifications of the Securities Clarity Act in a published statement opposing FIT21, stating that “the bill’s regulatory structure abandons the Supreme Court’s long-standing Howey test that considers the economic realities of an investment to determine whether it is subject to the securities laws. Instead, the bill makes that determination based on labels and the accounting ledger used to record transactions. It is akin to determining the level of investor protection based on whether a transaction is recorded in a notebook or a software database. But it’s the economic realities that should determine whether an asset is subject to the federal securities laws, not the type of recordkeeping ledger.”
• Securities: While the SEC would be able to object to a digital asset being self-certified as a digital commodity (as noted above in Decentralization), the SEC’s rebuttal in objecting would need to include a detailed analysis of its decision. Importantly, such self-certification would require the relevant network to meet the definition of “decentralized governance system.”
• Exemption: An issuer’s sale of digital assets would be exempt from registration under the securities laws if the following conditions were met:
  • The issuer’s total sales of the digital asset over the prior 12 months does not exceed $75 million.
  • A non-accredited investor’s purchases of the digital asset from the issuer over the prior 12 months are below 5% of the purchaser’s annual income or 5% of their net worth, whichever is greater.
  • The purchaser does not own more than 10% of the units of the digital asset after the completion of the transaction.
  • The transaction does not involve equity or debt securities.

• Stablecoins: Transactions in payment stablecoins would fall under the SEC’s anti-fraud or anti-manipulation enforcement authority if such transactions are brokered, traded, or custodied by a broker, dealer, or through an alternative trading system (ATS). Payment stablecoins themselves would not be regulated as securities.
• Consumer Protection: Customer protection obligations would be imposed on all entities that register with the SEC, and the SEC would be held to a standard of “adequate supervision” and “appropriate regulation.” These are minimum standards for supervision and regulation as are reasonably necessary to protect the digital assets of customers of an entity registered with the SEC, including standards relating to the licensing, examination, and supervisory processes.
• Enhanced Disclosures: Digital asset and any blockchain systems would be subject to enhanced disclosures, including information relating to the digital asset project’s operation, ownership, structure, and plan of development.

Provisions Affecting Both the CFTC and the SEC

• Joint Rulemaking: The SEC and the CFTC would be required to engage in joint rulemakings that further define key terms related to digital asset commodities and securities, and support the oversight of dually registered exchanges.
• Joint Advisory Committee: The SEC and the CFTC would be required to establish a Joint Advisory Committee on Digital Assets, composed of at least 20 digital asset market participants, designated to provide feedback and advice to the agencies on topics related to digital assets.
• Joint Studies on DeFi and NFTs: The SEC and the CFTC would be required to conduct joint studies on decentralized finance (DeFi) and non-fungible tokens (NFTs), addressing:
  • their respective size, scope, role, nature, and use;
  • general benefits and risks;
  • risks of integration into traditional markets; and
  • the levels and types of illicit activities in these markets.
• Anti-Money Laundering: Digital asset trading systems would be treated as financial institutions for purposes of the Bank Secrecy Act.
• Agency Fintech Hubs: The SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) and the CFTC’s LabCFTC would be formally codified, serving as resources to both the agencies and market participants.

FIT21 may be the most comprehensive crypto bill to make it out of the House, but it is not without certain gaps and omissions. For example, the bill does not address the status or role of DeFi or NFTs, except to require further study by the CFTC and the SEC on DeFi, and by the Comptroller General of the US (Director of the Government Accountability Office) on the role, purpose, and use of non-fungible digital assets. The bill also does not address or mandate disclosures regarding ESG issues, such as energy use, climate impact of mining activity, or board diversity.

The Road Ahead

While FIT21 has garnered some level of bipartisan support in the House, it still faces uncertainty in the Senate, numerous potential amendments, continued criticism from opponents (most notably, SEC Chair Gensler, who issued an opposing statement), and the possibility of veto by President Biden (who issued an opposing statement, but has not signaled any intention to veto FIT21). It is also running up against the shifting priorities brought about by a fraught election cycle.

Regardless, the passage of FIT21 in the House is a critical development for the US cryptocurrency industry, which has been stymied by regulatory ambiguity and the continual specter of enforcement. Despite persistent criticism of FIT21 by a cadre of lawmakers and regulators, FIT21 is seen as a pivotal step in achieving regulatory clarity for an industry plagued by uncertainty, and will potentially spur investment, innovation, and sustainable growth​ of digital assets within the wider economy.

Endnotes

[1] The SEC may stay the decision to approve self-certification due to ‘‘an inadequate explanation by the person making the certification; or any novel or complex issues which require additional time to consider.” The SEC’s rebuttal, however, may be appealed to the US Court of Appeals for the District of Columbia within 60 days of the rebuttal, and the court is granted the authority to review the certification de novo.

[2] Investment contract asset is defined in the bill as “a fungible digital representation of value (A) that can be exclusively possessed and transferred, person to person, without necessary reliance on an intermediary, and is recorded on registration a cryptographically secured public distributed ledger; (B) sold or otherwise transferred, or intended to be sold or otherwise transferred, pursuant to an investment contract; and (C) that is not otherwise a security pursuant to the first sentence of paragraph (1) [of Section 2(a) of the Securities Act of 1933].