On May 22, 2024, the U.S. House of Representatives passed H.R. 4763, the “Financial Innovation and Technology for the 21st Century Act” (FIT21), marking an important moment for the U.S. digital asset ecosystem and its attempt to introduce comprehensive rules for digital asset ecosystem and thus provide for regulatory clarity and consumer protection to support digital asset innovation in the U.S. This short piece offers a brief overview of the FIT21.
The FIT21 Act, introduced in July 2023, garnered bipartisan support. Chairman Glenn “GT” Thompson, along with Representatives French Hill, Dusty Johnson, Whip Tom Emmer, and Warren Davidson, introduced the legislation. Chairman Patrick McHenry, also a cosponsor, further demonstrates the broad consensus on the need for comprehensive digital asset regulation.
The aim of FIT21 is to design clear and functional federal requirements for digital asset markets. These requirements should provide regulatory clarity for market participants while maintaining robust consumer protection necessary for the digital asset ecosystem to thrive in the U.S.
FIT21 is structured into several titles, each addressing different aspects of digital asset regulation and innovation:
These sections define key terms under various laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, and the Commodity Exchange Act. Definitions cover terms such as “digital asset,” “blockchain,” “decentralised system,” and more, providing clarity on the scope and application of the Act.
Section 105 stipulates that the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are mandated to issue rules to further define key terms and provide exemptions from duplicative, conflicting, or unduly burdensome regulations. This includes defining terms related to digital assets and ensuring consistent regulatory standards. This development brings hope for future alignment. House Financial Services Committee Chairman Patrick McHenry has noted in his remarks what we have observed over the years: the SEC and the CFTC have vied for control over the digital asset class, creating a challenging situation for all stakeholders. This contention has led to firms being subjected to conflicting enforcement actions by the two agencies. In the realm of cryptocurrencies, the SEC and CFTC have historically lacked a cohesive strategy. However, given that the FIT21 directly provides both agencies with additional competencies, there is optimism that they will now find common ground.
Further, sections 106-107 outline the process for entities to file notices of intent to register as digital commodity exchanges, brokers, dealers, and digital asset intermediaries. The requirements include providing detailed information about management, operations, and compliance with statutory disqualifications and customer protection measures.
Section 202 delineates how digital assets offered as part of an investment contract should be classified and regulated, distinguishing them from traditional securities. According to this section, the term ‘investment contract asset’ means 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 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 101 of the Securities Act of 1933.
This title outlines the regulatory requirements for offering and selling digital assets. It includes exemptions for specific transactions, augmented disclosure mandates, and a certification protocol for digital assets. Specifically, section 303 mandates enhanced disclosure requirements concerning any digital asset and its associated blockchain system. Required disclosures include the source code, transaction history, the economics of the digital asset, development plans, ongoing development updates, and risk factors associated with the digital asset.
Title IV covers the treatment of digital commodities and assets, the authority over permitted payment stablecoins, and the registration requirements for digital asset trading systems, brokers, and dealers. It includes operational requirements, conflict of interest rules, and provisions for custody activities by banking institutions.
An interesting provision was included regarding the directives for studies on foreign adversary participation in the digital asset market. According to section 414, the CFTC and the SEC shall identify any digital asset registrants owned by governments of foreign adversaries and determine whether they are collecting personal data or trading data about U.S. persons. Furthermore, they are to evaluate whether any proprietary intellectual property of digital asset registrants is being misused or stolen by any governments of foreign adversaries.
Sections 501-512 detail the CFTC’s jurisdiction over digital commodity transactions, including the registration and regulation of digital commodity exchanges, brokers, dealers, and custodians.
This title outlines the findings and expresses Congress’s sense regarding the importance of fostering technological innovation within the digital asset ecosystem. The U.S. Congress, among several findings, clearly stipulates that “Digital assets, despite the purported anonymity, provide law enforcement with an exceptional tracing tool to identify illicit activity and bring criminals to justice.”
Furthermore, the SEC shall establish the Strategic Hub for Innovation and Financial Technology (FinHub) and the CFTC, the LabCFTC. According to FIT21, both of these labs have predominantly an internal function to shape the SEC’s and CFTC’s approach to emerging technologies, examine fintech innovations, coordinate the SEC’s response to new technologies, promote responsible innovation, provide internal education, advise on fintech matters, engage with stakeholders, and analyse the impact of regulations on fintech companies. Even though both hubs are to engage with stakeholders and provide persons working in emerging technology with information on rules and regulations, given the wording of FIT21, it does not seem that the U.S. Congress envisions them to become active regulatory sandboxes, as no specific discretion in oversight has been granted neither to SEC nor to the CFTC.
As the U.S. House of Representatives passed FIT21, the bill will now be sent to the U.S. Senate for consideration. As 71 Democrats and 208 Republicans voted in favour of the bill versus 3 Republicans and 133 Democrats who voted against it, it is foreseeable that the U.S. Senate will support and pass the bill in the near future.
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