In a major step to create a new regulatory framework for cryptocurrency, the U.S. House of Representatives last Wednesday passed H.R. 4763, the Financial Innovation and Technology for the 21st Century (FIT 21) Act.
Passed by a vote of 279-136, with 71 Democrats joining the majority of Republicans in favor of the bill, the proposed legislation would split the responsibility of regulating digital assets between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Overall, the legislation aims to protect investors at the initial stages of a digital asset’s development with strict rules and disclosures. As the digital asset matures and becomes decentralized, the regulation shifts to facilitate freer trading under different rules.
The bill provides that when a digital asset is first launched, especially if it is still controlled by its issuers, it would be regulated like a traditional security under the SEC and considered a “restricted digital asset.” Once the asset becomes “decentralized,” it would fall under the purview of the CFTC and may be regulated like a commodity.
The bill sets forth the following factors to be examined in determining whether a digital asset would fall under the purview of the SEC or the CFTC and outlines a process through which the factors are assessed:
- The extent to which the blockchain system (the technology behind the digital asset) is decentralized, which the Act defines to mean as not controlled by a single entity;
- How the asset is acquired, including whether the asset was obtained through the raising of capital in an initial offering or through a secondary-market transaction on an already regulated platform (such as an exchange); and
- Who holds the asset, such as the original issuer or another entity.
For assets under SEC regulation there would be strict disclosure rules to protect investors, similar to how stocks are regulated. Those in control of the asset must provide detailed information so potential buyers understand the risks.
FIT 21 also creates a self-certification process through the SEC for proving that a blockchain system has become decentralized and therefore under the purview of the CFTC. Any person, including issuers of crypto investment contracts, can self-certify that their digital assets are “decentralized.” Under this rebuttable presumption, ff the SEC does not object within 60 days, the system is considered decentralized and the asset becomes a “digital commodity.”
The CFTC would monitor the behavior and marketing practices of digital commodities. These digital commodities could be freely traded on CFTC-regulated platforms, with some restrictions. The bill also provides the CFTC with rulemaking authority over these digital commodities, giving the agency an opportunity to create new rules treating these assets differently from other commodities.
FIT 21 has a long road before it becomes law and is not without critics. SEC Chair Gary Gensler has criticized the bill, stating that FIT 21 would “create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts.” Gensler stated that the existing system of securities laws and oversight already provides “full, fair, and truthful disclosure that arms investors with the information they need to make investment decisions and enables regulators to guard against the types of fraud we’ve seen in the crypto field.”
In addition, the Biden administration released a statement opposing the bill in its current state, citing a lack of sufficient protections for consumers and investors who are engaged in certain digital asset transactions. The bill will now head to the Senate for approval, though Senate leadership has shown little interest in moving the bill through committee and to the floor for a vote. While FIT 21 future enactment prospects are uncertain, its passing in the House indicates how certain lawmakers view the future of crypto regulation.
In the past few years, the SEC and CFTC have both taken numerous enforcement actions against actors in the cryptocurrency markets such as exchanges, promoters, asset mining companies, and other entities. Whistleblowers can report cryptocurrency fraud or violations of the securities or commodities laws to the SEC and CFTC through those respective agencies’ whistleblower programs. If the SEC or CFTC investigates allegations and recoups over $1 million in sanctions in an enforcement action, the whistleblower may receive a percentage of the recovery as an award.
For a free, confidential review of your matter by experienced SEC or CFTC whistleblower lawyers, contact Phillips & Cohen. The firm’s partners include the former first head of the SEC Office of the Whistleblower, the former director of the CFTC’s Whistleblower Office and numerous attorneys with decades of experience representing whistleblowers.
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