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The House of Representatives plans to take up a bill tomorrow that would split up responsibility for cryptocurrency regulation between the Securities and Exchange Commission and the Commodities Futures Trading Commission, depending on the degree of centralized control of associated blockchains.
The Financial Innovation and Technology for the 21st Century Act known as FIT21, would give the SEC power over cryptos that remain tightly controlled by their developers or small groups of owners. More broadly decentralized tokens, which would include bitcoin and possibly ether, will be placed under the CFTC, which is more geared to serving knowledgeable institutional investors than the SEC, which aims to protect retail investors.
If the bill becomes law, it would end a perceived turf war between the two agencies and give the court system a specific framework for deciding regulatory disputes over crypto for the first time.
Advanced by the House Financial Services Committee in July, the legislation also seeks to strengthen transparency and accountability of crypto exchanges, brokers and dealers and provide a compliant way for blockchain developers to raise funds.
The CFTC would regulate a cryptocurrency as a commodity “if the blockchain, or digital ledger, on which it runs is functional and decentralized, according to Congressional Research Service. Conversely, the SEC would regulate a digital asset as a security “if its associated blockchain is functional but not decentralized.” The bill classifies a blockchain as decentralized if, “among other requirements, no individual has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person controls 20% or more of the digital asset or its voting power.”
However, the distinction would also depend on the status of the holder (e.g., an issuer vs. an unaffiliated third party) and how the digital asset is acquired (e.g., as part of a capital-raising primary offering, an airdrop or a transaction on a CFTC-regulated platform).
“FIT21 may be the most substantial piece of digital asset legislation in Congress’s history. In my view, the best way to spur continued investment and innovation for financial services and beyond is to have it enacted into law,” says Rep. French Hill (R-Ark.)—who chairs the subcommittee on digital assets. Hill is a potential successor to House Financial Services Committee Chair Patrick McHenry (R-N.C.), who plans to retire at the end of this term.
The bill has garnered support from former President Donald Trump and many of his advisors, according to Hill. “They think this is an important part of America’s innovative leadership in the world,” he says.
Sixty digital-asset organizations and companies, including crypto exchanges Coinbase and Kraken and venture capital firm Andreessen Horowitz, have also expressed their support. “While FIT21 is not a perfect bill (no bill is!), this is a critical and historic step toward establishing a federal regulatory framework for digital assets in the US,” said Sheila Warren, CEO of the Crypto Council for Innovation, in comments shared with Forbes.
While FIT21 is likely to pass the House, its prospects in the Senate remain uncertain. However, Rep. McHenry reportedly suggested last week that the level of support by Democrats during the House vote could significantly influence the Senate’s decision.
“This bill is very reflective of many Democratic priorities on the House Financial Services Committee, so I think you’ll find support on both sides of the aisle for a digital-assets market structure bill. And with the year-end packages, the reauthorization of the Farm Bill, there is a number of legislative alternatives other than just simply passing the bill across the House floor and the Senate floor,” adds Hill.
The anticipated House vote comes just six days after the U.S. Senate overturned an SEC crypto accounting policy, Staff Accounting Bulletin (SAB) 121, which requires companies holding customers’ cryptocurrencies to record them on their balance sheets. This mandate could have significant capital implications for banks and financial institutions working with crypto clients. President Joe Biden has said he would veto the effort.
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