Vote on landmark US bill likely to shake up the cryptoverse

This article was updated on May 27 to reflect the adoption of FIT 21 by the House of Representatives on May 22.

The adoption of the FIT21 regulation by the US House of Representatives gives the US crypto sector hope that greater regulatory certainty will follow. It is be the first piece of law classifying crypto tokens as commodities or securities. This greatly matters as assets classified as commodities fall under far less stringent rules than securities.

The Financial Innovation and Technology for the 21st Century Act (FIT21)stems from Republicans on the House Financial Services Committee. The bill gives the Commodity Futures Trading Commission (CFTC) the power to regulate digital assets as commodities when these qualify as decentralized. This is defined as assets which have no person unilaterally controlling the blockchain or its usage and have no issuer or affiliated person controlling more than 20 percent of the crypto asset or its voting rights.

This would mean that Bitcoin and probably also Ether, whose combined market cap makes up two thirds of the global crypto sphere, would qualify as commodities much to the chagrin of the Securities and Exchange Commission (SEC). They would with the adoption of FIT21 continue to regulate digital assets as securities, but only when these don’t qualify as decentralized.This would cause a headache for the SEC, which last year alone sued 26 crypto players, notably claiming they violated securities laws. Crypto firms have also been fined billions of dollars for non-compliance with existing US rules.

The adoption of the bill “would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk,” the Chair of the SEC, Gary Gensler, warned in a statement ahead of the vote.

The Crypto Council for Innovation, Coinbase (the largest US crypto exchange), Kraken (another leading US crypto exchange, Paxos (a fintech specialized in blockchain) and many other crypto players disagree:

FIT2 “provides clarity on which digital assets are regulated by each agency. By passing this legislation, we can accelerate the growth of blockchain technology and digital assets... It is crucial for the U.S. to maintain its leadership in financial innovation,” they write in a support letter.

Bipartisan support for the bill in the House

“#FIT21 is BIPARTISAN. It's the product of years of collaboration between Republicans and Democrats, as well as @HouseAgGOP and the Financial Services Committee. Tomorrow[May 22], we take a monumental step for American innovation and consumer protection,”underlines the Financial Services Committee, which is behind the bill.

“FIT21 is a first step to establish a regulatory framework for digital assets – and it must be improved by working with the Senate and the [Biden] Administration... The [US] digital asset industry needs clearer rules of the road and the federal government needs stronger enforcement authority in order to ensure the responsible development of this emerging technology," Pelosi said following the vote.

The Biden administration expressed its eagerness to adopt comprehensive and balanced framework governing crypto assets, but added the current legal text isn't good enough."Its current form lacks sufficient protections for consumers and investors who engage in certain digital asset transactions," the executive office of the president said.

Whether FIT21 will be approved by the other US chamber, the Senate, remains unclear. Even if the bill passes both chambers, the US President Jo Biden could veto it.