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A key crypto bill is set for a House vote tomorrow. The Financial Innovation and Technology for the 21st Century Act (FIT21)

FROM COINBASE BYTES: 5/21/2024

Inside the bill that could shape the future of the U.S. crypto industry

Even though nearly 20% of Americans have purchased crypto, and many of the world’s most innovative crypto companies are based here, the United States lags far behind most developed economies when it comes to crypto regulation.

This week, however, Congress is finally poised to vote on a landmark piece of legislation that would create a comprehensive, federal regulatory regime for crypto in the U.S.

The Financial Innovation and Technology for the 21st Century Act (FIT21) has been hailed by cosponsor Rep. Patrick McHenry (R-N.C.) as the “culmination of years of bipartisan efforts to finally provide clarity.” And in a recent town hall meeting, Rep. Ritchie Torres (D-N.Y.) praised the bill for offering “regulatory clarity where none exists. It protects both consumers and investors.”

Among many other things, the bill would clarify questions around which agencies have the responsibility to regulate various aspects of the crypto industry, create consumer protections for the 52 million Americans who own crypto, and give web3 developers looking to launch projects in the U.S. clear rules of the road.

In advance of the vote, which is expected to take place on Wednesday, here’s what you need to know.

Why is FIT21 important?

Given the U.S. is home to both Wall Street and Silicon Valley, it’s unsurprising that it’s grown into a global crypto hub. But the chaotic regulatory picture here — especially as compared to regions including the U.K., the EU, and some parts of Asia that have made significant strides in providing clarity — means crypto companies and innovators are increasingly looking outside the U.S.

An estimated 2% of web3 developers have been leaving the U.S. annually due to potential risks around basing a digital asset project here, and around 4 million blockchain-related jobs are at risk over the next 5-to-7 years.

Coinbase supports FIT21, saying the bill “offers a strong regulatory framework providing clear definitions, consumer protections, and a path for regulation that does not stifle innovation.”

Here are some of FIT21’s major provisions:

FIT21 would clarify which agency has regulatory jurisdiction over different parts of the crypto ecosystem.

Currently, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) both claim jurisdiction to regulate the crypto industry, and the fractured landscape makes it difficult for crypto companies to operate amid limited and confusing guidance and heavy-handed enforcement actions.

FIT21 would clarify that the CFTC has jurisdiction over digital commodities, while the SEC’s jurisdiction would be focused on digital assets offered as part of an investment contract.

How would crypto commodities and securities be defined?

In very basic terms, it comes down to decentralization. As a16z crypto’s FIT21 explainer puts it, the CFTC would regulate a digital asset as a commodity “if the blockchain, or digital ledger, on which it runs is functional and decentralized.” (Disclosure: a16z is a Coinbase investor.)

The SEC would regulate a digital asset as a security “if its associated blockchain is functional but not decentralized.”

The bill also provides a definition for decentralization, including the requirement that no individual can control the blockchain and that “no issuer or affiliated person” controls more than 20% of the project’s digital assets or voting power.

The bill would also create new consumer protections for crypto users.

The legislation helps protect consumers by requiring increased transparency and accountability from the crypto industry.

Digital-asset institutions like crypto exchanges would be required to segregate customer funds from their own, provide appropriate disclosures to customers, and reduce potential conflicts of interest through registration and operational requirements.

The bill would also require digital asset developers to provide accurate information about their project’s operations, ownership, and structure. It also requires lock-up periods for tokens issued to insiders.

Who supports this bill?

FIT21 passed out of two committees last July with bipartisan support, and is now advancing to a full House vote with supporters on both sides of the aisle.

Rep. McHenry, who chairs the House Financial Services Committee, has made passing FIT21 a top priority for 2024 during his final term in Congress before retiring. Meanwhile, a letter from eight House Democrats this week said that the bill would “promote a secure, innovative, and inclusive financial future.”

Can FIT21 pass in the House of Representatives?

Yes, it’s definitely possible. This past Thursday, another crypto-related bill (which would overturn a controversial SEC rule that makes it harder for banks to handle crypto customers) garnered support from 12 Democrats and 48 Republicans in the U.S. Senate, which has some observers hopeful that similar levels of bipartisan support are possible for FIT21.

“There’s still some big names on the Democratic side who haven’t made their thoughts known,” said Rep. Wiley Nickel (D-N.C.). “The advice I’m giving Democrats is, we cannot hand this issue to Republicans.”

What could happen next?

If FIT21 passes in the House, that alone represents a huge step forward. The bill’s next stop would be the Senate, which could approach the legislation in a variety of ways. Aside from a straightforward vote, one possible approach comes from Rep. French Hill (R-Ark.), who is in line to succeed Rep. McHenry as chair of the Financial Services Committee. Hill has suggested tying FIT21 to one of Congress’s larger spending bills before the end of the year.

The bottom line…

There aren’t many issues more important to the future of the U.S. crypto industry than regulatory clarity — and FIT21 would make major strides in that direction.