On May 22, 2024, the US House of Representatives passed H.R. 4763, the Financial Innovation and Technology for the 21st Century Act (FIT21), which would amend existing securities and commodity regulatory statutes to facilitate the use of digital assets, by a vote of 279 – 136. The passage of FIT21 marks an important milestone in the development of a federal regulatory regime for digital assets in the United States as it is the first time a chamber of Congress has passed major digital asset legislation.
In addition, the strong bipartisan vote for FIT21 demonstrates significant support in Congress for digital asset legislation despite the opposition of federal regulators, particularly the Securities and Exchange Commission (SEC). On the day of House’s vote on FIT21, SEC Chairman Gary Gensler released a statement expressing his concerns about the legislation’s potential to undermine investor protection and rejecting the need for new digital asset regulations. Nevertheless, 71 Democratic House members—including former Speaker of the House Rep. Nancy Pelosi and current House Minority Whip Rep. Katherine Clark, along with 208 Republican members—voted for FIT21.
Even with the strong support for FIT21 in the House, however, its future in the Senate is very uncertain. Most importantly, President Joe Biden does not support the legislation in its current form. Prior to the House vote, the White House released a Statement of Administrative Policy (SAP) stating that the Administration opposed passage of FIT21. The SAP stated that the “Administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets, building on existing authorities,” but that FIT21 “lacks sufficient protections for consumers and investors.” As a result, it is highly unlikely that the Democratic-controlled Senate would bring up FIT21 for a vote unless the bill was amended to secure President Biden’s support. However, if FIT21 is considered by the Senate, the Senate’s recent 60 – 38 vote to pass the joint resolution of disapproval of the SEC’s Staff Accounting Bulletin No. 121 (which imposes high regulatory requirements on public companies, including publicly traded banks, to custody digital assets) under the Congressional Review Act suggests that the 60-vote majority needed to overcome a Senate filibuster may exist in the Senate.
In this Legal Update, we provide a summary of FIT21 and its key provisions.
FIT21 would establish a federal digital asset regulatory framework by clarifying the regulatory responsibilities of the SEC and CFTC over digital asset products and transactions, as well as update existing securities and commodity laws to account for various blockchain technology applications, including decentralized protocols.
The bill would create three categories of digital assets, which would determine whether a digital asset falls under SEC or CFTC jurisdiction; i.e., as a:
Under the bill, a digital asset would generally be considered a “restricted digital asset” unless it meets the definition of a “permitted payment stablecoin,” or is self-certified as a “digital commodity.” The bill would establish criteria for determining whether a digital asset can be considered a “digital commodity” or a “restricted digital asset” based on:
(1) the level of decentralization and functionality of the digital asset’s underlying blockchain system;
(2) the method of acquisition of the digital asset by an end user; and
(3) the party holding the digital asset (e.g., issuer or unaffiliated third party).
For illustration, it would be likely that a digital asset would meet the criteria for being a “digital commodity” if it (1) is issued through a distribution that is not used for fundraising (i.e., involves only an exchange of nominal value for the digital asset) and is open to all participants equally (i.e., a rewards program) or acquired through a digital commodity exchange; and (2) relates to a blockchain protocol that is functionally decentralized. On the other hand and in contrast, a digital asset would likely to be considered a “restricted digital asset” if it is not related to a functionally decentralized network and is obtained through an issuer distribution in exchange for meaningful value.
The bill would create a self-certification process for “digital commodities,” under which any person could file a certification with the SEC (not the CFTC) that the blockchain system to which a digital asset relates is a decentralized system (while the SEC oversees self-certification, both the SEC and CFTC are directed to engage in joint rulemaking on the self-certification criteria).
The SEC would have 60 days to reject the certification before the assets on such a system would be considered “digital commodities” subject to CFTC jurisdiction. Under this determination by the SEC, a “restricted digital asset” could initially be issued as a security—subject to SEC disclosure and offering requirements similar to those that apply to traditional securities, but specific to digital assets—and later become a “digital commodity” through self-certification. Importantly, a digital asset certified as a “digital commodity” may still be considered a “restricted digital asset” at the same time and is determined based on the holder (e.g., the units held by the issuer, an affiliate of the issuer, or who beneficially owns 5% or more of the outstanding units).
The bill would define “permitted payment stablecoins” as digital assets issued by an issuer subject to regulation by a federal or state regulator (with authority over issuers of payment stablecoins) which:
(1) are used or designed to be used as means of payment or settlement;
(2) the issuer of which (a) is obligated to redeem for a fixed monetary value or (b) represents the asset will maintain or creates the reasonable expectation that it will maintain stable value relative to a fixes amount of monetary value; and
(3) excludes (a) national currency or (b) securities issued by a registered investment company.
The bill would require digital asset intermediaries (i.e., those who trade, transfer, facilitate trading, clear or custody these assets) to register with the SEC or the CFTC, based on the type of digital asset in which it transacts (i.e., “restricted digital assets” with the SEC or “digital commodities” with the CFTC).
The bill would establish a CFTC-SEC Joint Advisory Committee on Digital Assets, a group of 20 nongovernmental stakeholders (10 appointed by each of the CFTC and SEC), which would provide advice on digital asset rules, regulations, and policies to the CFTC and SEC, including on how to the agencies should measure and quantify decentralization, functionality, information asymmetries, and transaction and network security of digital assets.
The bill directs the CFTC and SEC to jointly conduct a study to assess whether additional guidance or rules are necessary to facilitate the development of tokenized securities and derivatives products (which would represent application of blockchain technology to the broader financial market).
The bill would create a safe harbor for “decentralized finance activities,” which would largely exempt certain users from compliance with FIT21 who participate in or provide services for the operations and maintenance of blockchain networks or decentralized finance (DeFi) systems (e.g., operating or participating in a liquidity pool, participating in network operations or computational services, hosting end-user interfaces for DeFi, or writing or publishing DeFi software).
Joint SEC-CFTC Rulemakings
The SEC, in conjunction with the CFTC, would be required to issue rules to:
SEC Mandated Rulemakings
The SEC would be required to engage in rulemaking to:
CFTC Mandated Rulemakings
The CFTC would be required to engage in rulemaking to:
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