A Good Fit for Crypto? The House Passes FIT21

The United States House of Representatives voted 279-136 to pass the Financial Innovation and Technology for the 21^st Century Act ("FIT21"), on Wednesday, May 22, 2024. FIT21 is the first crypto-related legislation to clear one of the chambers of Congress, and the bipartisan support the bill has attracted in the House has led to favorable comment on its chances of passage in the Senate.

FIT21 would make sweeping changes to the regulation of crypto assets, markets, and market participants. It would allocate jurisdiction over such assets, venues and entities between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Among other provisions, FIT21 would:

• Distinguish between "restricted digital assets", subject to the SEC's jurisdiction, and "digital commodities", which would be subject to the CFTC's jurisdiction.
• Provide legal recognition of "decentralization" as a potential feature of blockchain systems. FIT21 recognizes that a restricted digital asset would initially be issued as a security regulated by the SEC, but that the asset may then evolve to become a CFTC-regulated "digital commodity" if the blockchain on which the asset is based is deemed to be "decentralized" and "functional".
• Permit any person to file a certification before the SEC that the blockchain system meets the criteria required to be considered functional and decentralized. The SEC has 60 days to rebut a certification but if it does not, and if the blockchain system were deemed decentralized, assets on the blockchain would be considered digital commodities subject to the CFTC's jurisdiction.

FIT21 would require brokers, dealers, and exchanges transacting in restricted digital assets to register with, and be regulated by, the SEC as digital asset brokers, digital asset dealers, and digital asset trading systems respectively. Brokers, dealers, and exchanges transacting in digital commodities would be required to register with, and be regulated by the CFTC as digital commodity brokers, digital commodity dealers, and digital commodity exchanges.

FIT21 contemplates that the same entity may register in multiple capacities with both the SEC and the CFTC and may therefore transact in both restricted digital assets and digital commodities. FIT21 would also allow entities to provisionally register with the SEC and CFTC until further rulemaking can be completed, and such provisional regulation would act as a safe harbor from registration-related enforcement actions by the SEC and CFTC.

If enacted, FIT21 would dramatically alter the Federal regulatory landscape for crypto assets. It would break new ground by giving the CFTC extensive regulatory jurisdiction over the spot trading of digital commodities, as well as the entities and platforms that transact in such commodities. Importantly from the perspective of crypto market participants, FIT21 would permit and regulate the trading of digital commodities and securities on a single platform.

We will follow this brief Newsflash on FIT21 with a more detailed summary of FIT21's principal features and implications.