FIT21 is the first digital asset legislation in U.S. history to be passed in any country.
FIT21 is the first digital asset legislation in U.S. history to pass either chamber of Congress – the House of Representatives, in this case.
He did so with strong bipartisan support. 71 Democrats joined 208 Republicans to pass the legislation by a two-to-one margin.
“The passage of FIT21 by an overwhelming bipartisan majority last week was symbolic. Christine Smith, CEO of the Blockchain Association, told Cointelegraph that this shows that both sides are willing to work together and that Congress, not the SEC, should set policy.
It also indicates that the political winds in Washington, D.C., could be changing. “The cryptocurrency industry is more regulated than ever – and we now have all the elements we need to make the case for smart policy,” Smith added.
In a press release issued on May 22, the U.S. House of Representatives Committee on Financial Services called the passage of FIT21 “a watershed moment for the U.S. digital asset ecosystem.”
Not only did FIT21 receive more bipartisan support than its most ardent supporters hoped, but a third of House Democrats supported it, including Speaker Nancy Pelosi.
However, this happened almost simultaneously with “the SEC’s change of heart about ether,” Zach Zweihorn, a partner at law firm Davis Polk, told Cointelegraph.
The agency approved exchange-traded funds on the Ethereum spot market on May 23, which is a major change in itself.
Also significant was the May 16 Congressional Review Act vote to repeal PPP 121, which “received 60 votes in the Senate, including from prominent Democrats like Chuck Schumer,” Zweihorn added.
This makes it easier for financial institutions and highly regulated companies to act as custodians of digital assets.
Double Encryption Agency Regulations
However, a potential sticking point with FIT21 is its “dual agency” regulatory system. Digital assets will be regulated by either the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), depending on the decentralization of their underlying networks or projects.
The Commodities Regulatory Authority will oversee decentralized assets such as Bitcoin (BTC), while the SEC will be able to regulate tokens used to raise capital for new digital projects (e.g., initial coin offerings), which are more similar to securities traditional.
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“Having two regulators (SEC and CFTC) can cause confusion among market participants. “We hope to see the Senate explore this issue further as it seeks to develop its own legislation,” Smith said.
Some saw the benefit of the two-agency structure, but only because it would further restrict what is seen as the SEC’s stifling influence over cryptocurrency and blockchain innovation.
“FIT21 should help reduce some of the SEC’s authority over the cryptocurrency space,” Kadan Stadelmann, chief technology officer at Comodo, told Cointelegraph. “Currently, the SEC led by (Chairman Gary) Gensler has too much control and its decision-making process has hindered blockchain innovation in the United States.”
“The framework of the legislation “takes the first step by saying that there should be a limiting principle according to which the chambers (i.e. limit) the jurisdiction of the SEC, which is much clearer than this that we got from Chairman Gensler’s open-ended, non-statutory approach. ” Jack Soloway, a fintech policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, told Cointelegraph.
There is no doubt that regulating digital assets is not easy. For one thing, they can change form and function over time, Matthew Le Merle, co-founder and managing partner of Blockchain Coinvestors, told Cointelegraph:
“As an example, a token may start as a security tool and evolve into a commodity as the network decentralizes.”
In another example, Polkadot’s native Polkadot token (DOT) was initially offered “sold and delivered to buyers as collateral” but later evolved or “converted and ceased to be a security.” It’s software,” according to the Web3 Foundation.
“The way the bill works, the same token can simultaneously be a restricted digital asset, subject to the jurisdiction of the SEC, and a digital product, subject to the jurisdiction of the CFTC – depending on factors such as how it was obtained or who owns it. he. “It raises a lot of complexity,” said Zweihorn of Davis Polk.
For a currency to fall under the CFTC’s jurisdiction, the underlying project must be certified as a “decentralized system,” Zweihorn continued. “There is a very detailed and complex definition of what constitutes a decentralized system, and some of the necessary elements can be ambiguous.”
Zweihorn added that the SEC is the agency that decides – subject to judicial review – whether a system has become decentralized. Based on history, one might expect the SEC to continue to “have a very narrow view of what constitutes a decentralized system.”
Perhaps this is why not everyone in the cryptocurrency community is celebrating FIT21. Cryptocurrency lawyer Gabriel Shapiro announced that the legislation would still give the SEC “tremendous power” to regulate cryptocurrencies in the United States.
However, “most cryptocurrencies will be considered commodities by default,” wrote George Shakro, an associate attorney at Gordon Law, on May 28. No Be under the unilateral control of a single person or entity for at least 12 months. Shakro added:
“If an individual or entity owns five percent or more of the total asset supply, 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 will be open to different interpretations, “and I suspect there will be a lot of disagreement when it is applied to specific assets.”
Regardless, many agree with Stadelman that “some sort of comprehensive regulation of cryptocurrencies is needed in the United States.” The European Union, Switzerland, Singapore and the United Arab Emirates are moving forward. Due to unclear regulations, US citizens have less access to many cryptocurrency products and services. “This puts both cryptocurrency companies and users at a disadvantage.”
Politicians listen to cryptocurrency holders
On the other hand, FIT21 is actually more of a framework than a final plan for the supervision of cryptocurrencies, and perhaps the details can be negotiated at a later date. In fact, an important lesson from FIT21 could be that US politicians who ignore cryptocurrencies now do so at their peril.
For example, Variable Funds’ Jake Chervinsky claimed that FIT21, with its strong Democratic support, was “sending a message to the Biden administration that ‘anti-crypto’ is a losing platform this year.”
Perhaps such a statement goes too far?
“This doesn’t go far enough. “America’s future depends on our ability to gain a leadership position in a rapidly digitalizing world – most other countries are now ahead of us in this regard,” Le Merle responded. “The so-called “anti-crypto army” of (US President Joe) Biden and (Senator Elizabeth) Warren has caused significant damage to US competitiveness and innovation while behaving capriciously and arbitrary, even illegal.”
A recent report from Blockchain Coinvestors predicts that the regulation of digital assets will be a major election issue in the United States for the first time in 2024, “particularly among politicians seeking to attract the votes of digital citizens.”
“We are seeing growing support from everyday users; “The more than 50 million Americans who own or invest in cryptocurrencies are more active and vocal than ever – and Washington is clearly listening to them,” said Smith of the Blockchain Association.
“At the very least, the idea among some progressives that an anti-crypto stance will only have an electoral advantage and no electoral disadvantage is in serious question,” added Soloway of the Cato Institute.
Could FIT21 become law in 2024?
What are the chances that FIT21, or any form of legislation, will be enacted in 2024, an election year in the United States?
“Never say never, but it would be very helpful to pass FIT 21 in the Senate this year, given the limited time remaining on the legislative calendar in an election year,” Soloway said.
“She has a good chance of passing,” Stadelman said. “Looking at the polls, Democrats estimate they will lose to Republicans in several key battleground states. In an effort to win over independents, Democrats have started to shift and take a more pro-crypto approach.
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Smith added that according to a recent poll conducted by DCG and The Harris Poll, one in five voters in swing states consider cryptocurrency a major issue in the election.
Zweihorn said it could also be a good sign that President Biden has not threatened to veto the FIT21 legislation, while saying he is willing to work with Congress on a “comprehensive and balanced regulatory framework for digital assets”. “This could mean that there is room for negotiation to reach a viable legislative solution. »
Overall, “there certainly seems to be a changing wind,” Zweihorn commented, although FIT21 still faces an uphill climb in the Senate. But in light of the 60th Senate vote on the resolution disapproving the Senate’s recently issued Resolution No. 121, “it’s not impossible.”
