Understanding FIT 21: The Future of Crypto Regulation in the U.S.

FIT 21 is a proposed legislative framework aiming to clarify the regulatory landscape for cryptocurrencies in the United States. It categorises digital assets into digital commodities and restricted digital assets, assigning regulatory authority to the CFTC and SEC respectively. Despite its potential, FIT 21 faces challenges ahead, including legislative uncertainty and possible jurisdictional conflicts between regulators.

The Financial Innovation and Technology for the 21st Century Act (FIT 21) is a legislative initiative aiming to define roles within crypto regulation. With around 40% of American adults owning cryptocurrency and significant corporate contributions during the 2024 presidential election, this sector has garnered attention from lawmakers. Passed by the House on May 22, FIT 21 seeks to streamline regulatory oversight of the crypto industry, though its legislative journey remains uncertain.

FIT 21 results from collaborative efforts among legislators, industry participants, and financial institutions, spearheaded by crypto lobbyists. Supported by major companies like Coinbase and Digital Currency Group, the bill addresses criticisms regarding the government’s inconsistent regulatory framework. If passed, FIT 21 aims to clarify whether cryptocurrencies are classified as securities or commodities and enhance consumer protections.

The proposed law categorises digital assets into three groups: digital commodities, restricted digital assets, and permitted payment stablecoins, with regulatory authority split between the SEC and CFTC. Digital commodities will fall under the oversight of the CFTC, while restricted digital assets will be governed by the SEC, which has been active in defining the securities status of many digital assets.

Under FIT 21, a digital commodity’s decentralisation is critical to its classification. The SEC is tasked with assessing an asset’s decentralisation within 60 days, which includes evaluation of ownership stakes and recent blockchain developments. If an asset is validated as a digital commodity, registration with the CFTC is mandatory, although the process faces challenges regarding timely approvals.

Restricted digital assets are those classified as securities. FIT 21 aims to limit the SEC’s jurisdiction over digital assets by excluding investment contract assets from federal securities definitions. This restriction could significantly lessen the SEC’s influence within the cryptocurrency landscape, although it complicates the regulatory framework.

There are notable weaknesses in FIT 21, particularly regarding the SEC’s response time and the jurisdictional overlap between the SEC and CFTC. Notably, the legislation does not mention staked digital assets, raising questions about regulatory clarity in such cases. Ambiguities in the definitions of digital assets could lead to a cryptocurrency being classified under both jurisdictions.

To address dual registration issues, FIT 21 proposes that both the SEC and CFTC formulate joint rules for dually registered entities, although there is scepticism regarding their willingness and capability to establish cohesive regulatory guidelines. Critics argue that dividing jurisdiction between them may complicate regulatory enforcement rather than simplify it.

Despite its potential to provide a clearer regulatory framework for the crypto industry, the future of FIT 21 remains uncertain as it awaits Senate action. The approaching federal elections could also impact regulatory development. If enacted, FIT 21 has the potential to create a balanced approach that safeguards innovation while protecting investors, though it still has much to address.

David Rosa, an analyst from the Guha PLLC law firm, contributed insights to this overview.