FIT 21, a legislative plan to clarify the role of different regulatory agencies in the oversight of crypto industry, may have a difficult path to passage, but is details are worth considering
Far from its early fringe existence, cryptocurrencies have grown to be a strong presence in American political and financial life, with approximately 40% of American adults holding some form of cryptocurrency. Indeed, recent reporting noted that cryptocurrency companies accounted for almost half of all corporate donations during the 2024 presidential election thus far.
Not surprisingly, legislators in Washington are taking note. On May 22, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT 21) as a major step towards productive regulation of the crypto industry. Understanding the contours of FIT 21 is valuable and helpful, even as this draft bill navigates an uncertain legislative path.
FIT 21 did not emerge out of thin air. The proposed legislation is the product of significant efforts by varied crypto stakeholders, including legislators, industry participants, and interested financial institutions. Crypto lobbyists pushed heavily for FIT 21 on Capitol Hill, and the bill was publicly supported by leading voices in the industry including Coinbase, The Block, and Digital Currency Group. FIT 21 would mark a response to the crypto industry’s criticism that the government has to date pursued regulation of digital currencies without sufficient guidance to provide market participants with rules of the road.
If enacted, FIT 21 would provide a clearer set of tests to determine if a cryptocurrency is a security or commodity. In making this critical determination, the bill works to outline more clearly the jurisdiction over cryptocurrency between regulators, increase consumer protections, and clarify compliance obligations. Notably, FIT 21 proposes expanding Bank Secrecy Act (BSA) requirements to the crypto industry, offering BSA reporting and compliance procedures for crypto products that to date have been unclear.
An overview of FIT 21
FIT 21 separates digital assets into three categories: digital commodities, restricted digital assets, and permitted payment stablecoins — but it only promulgates substantive guidance and regulation for the first two. FIT 21 allocates regulatory authority over digital commodities and the market participants who trade them to the U.S. Commodities Futures Trading Commission (CFTC); and by contrast, the bill designates regulatory authority over restricted digital assets to the U.S. Securities and Exchange Commission (SEC).
Digital commodities
FIT 21 defines an asset to be qualified as a digital commodity based on an assessment of decentralization. Under the proposed legislation, an asset must be submitted to the SEC for certification to measure whether the asset may be considered sufficiently decentralized and functional. Decentralization, for the purpose of FIT 21, is measured by an assessment of ownership stake, voting power, authority to control the functionality of the blockchain, recency of changes to the source code, and recency of public marketing of the digital asset as an investment.
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The SEC has 60 days to consider the application and either accept the asset as a digital commodity or reject the request. If an asset is approved as a digital commodity, it must then be registered with the CFTC. Should the SEC disagree that a blockchain is functional or decentralized, the agency must publish a rebuttal notice with a detailed analysis of the factors used to conclude its opposing view. Rebuttals can be appealed in federal appeals court.
After the SEC certifies a cryptocurrency’s blockchain as 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 as well.
Restricted digital assets
Cryptocurrencies that are considered securities under FIT 21 are called restricted digital assets. The SEC has been vocal in its public commentary and regulatory actions that many digital assets are securities. FIT 21’s designation of restricted digital assets would provide the agency with a legislative toehold for its long-held 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 typical of SEC-regulated industries and assets.
FIT 21 does limit the SEC’s reach. FIT 21 would narrow the application of the federal security definition to digital assets by excluding investment contract assets, which would in effect remove many digital assets from the scope of federal securities laws. In doing so, FIT 21 would severely limit the jurisdiction of the SEC in this space.
Weakness of FIT 21
The FIT 21 legislation, as currently written, is not without its flaws. For example, while the SEC has 60 days to respond to decentralization certification requests by statute, it seems unlikely that such a quick turnaround will be feasible in practice.
Moreover, one flaw of FIT 21’s framework is that while it allocates regulatory purview to the SEC and CFTC as opposed to other agencies or the U.S. Department of the Treasury, the delineation of power between the CFTC and SEC may in practice experience growing pains. For instance, staked digital assets — crypto assets that are locked for a set period of time, typically used to support blockchain operations with the expectation that one can earn more crypto assets once the lock expires — are not explicitly mentioned in the bill. As such, it is unclear where exchanges that offer staking or blockchains that use staking for governance voting rights fall in the dual jurisdiction framework, or if they fall within it at all.
Commentators also have noted that FIT 21’s definition of digital asset excludes the phrase “any note.” As such, the SEC could claim that staked assets are notes, but the underlying asset, like Ethereum or a stablecoin, could be considered a commodity. This might create a regime in which a given cryptocurrency can be both a digital commodity and a restricted digital asset, and thus possibly subject to two different regulatory requirements.
FIT 21’s proposed solution to this dual-regulatory jurisdiction is requiring the SEC and CFTC to develop joint rules that specify how an entity may dually register with both agencies. However, skepticism over smooth joint rulemaking is warranted, as both agencies have resisted prior calls for rulemaking and engaged in a multi-year turf war over crypto jurisdiction. In fact, some market participants have taken aim at FIT 21 for bifurcating jurisdiction between the two regulatory agencies.
Conclusion
While FIT 21 is promising and would provide a meaning step towards a substantive framework for crypto regulation and growth in the United States, its future is not certain. The proposed bill still has not been scheduled for a vote in the Senate and it is unclear if it will happen before the year’s end or the possible next administration. The forthcoming November federal elections may also drive the regulatory efforts in the industry.
As the draft bill stands now, FIT 21 provides promise in creating 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 outlining compliance and reporting procedures and allotting necessary resources to regulatory enforcement. While the proposed bill has its flaws, FIT 21 brings us one step closer towards the goal of creating a meaningful and effective regulatory regime for the crypto industry that neither stifles innovation nor leaves investors unprotected.
