Crypto cheered FIT21 — here’s why the industry is now ready to fight over details in the bill

Crypto cheered FIT21 — here’s why the industry is now ready to fight over details in the bill
Ranking Member Rep. Maxine Waters, D-CA., left, and Chairman Rep. Patrick McHenry, R-NC, right, on the HOuse Financial Services Committee. Credit: Ken Cedeno/UPI/Shutterstock
  • Crypto advocates cheered House passage of landmark crypto legislation in May.
  • Some in the industry don't want it to go any further.
  • 'There are a lot of fundamental problems with the bill,' one crypto attorney said.

Crypto advocates cheered a landmark bipartisan bill that sailed through the US House of Representatives last month. Yet they are prepared to fight tooth and nail to ensure it goes no further unless massive changes are made to it.

The bipartisan vote included a substantial number of Democrats, and signalled that Congress, like the crypto industry, was eager to rescue digital assets from their legal limbo, according to industry attorneys who spoke to DL News.

Although the industry wanted to accept a symbolic victory, the bill itself would give unprecedented power to the regulators who have waged legal warfare on crypto, the attorneys said.

Radical revision

As such, some in the industry have said it needs radical revision before it advances any further.

The Senate isn’t expected to vote on the bill this year, but could consider the legislation, or parts of it, in next year’s session.

“What started out as probably a well-intended and somewhat well thought-out attempt has gotten muddied very heavily by a lot of input over time,” Alexander Lindgren, an attorney at LLOY Law LLP, told DL News.

“There are a lot of fundamental problems with the bill,” he said.

A ‘ringing endorsement’

The Financial Innovation and Technology for the 21st Century Act, known as the FIT21 Act, would end the “food fight for control” of crypto between the US Securities and Exchange Commission and the Commodity Futures Trading Commission, according to Representative. Patrick McHenry of North Carolina, the bill’s co-sponsor and the Republican chair of the House Financial Services Committee.

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FIT21 sets up definitions for crypto assets, and divides responsibility for its regulation between the CFTC and the SEC.

The rules would grant the CFTC, which is considered friendlier to crypto, more jurisdiction over the sector. Definitions determine whether an asset would be subject to SEC or CFTC oversight.

In a statement after the House vote on May 22, Blockchain Association CEO Kristin Smith called the bill’s passage “a watershed moment and badge of congressional validation for the crypto industry in the United States.”

Crypto attorney Orlando Cosme said he was among those privately hoping the bill would pass, despite misgivings.

That’s because of the way it had been framed in the weeks leading to the House vote.

“If you’re pro-crypto, you’re going to vote yes on this bill, and if you’re against crypto, if you want crypto to die … then you should vote against it,” he said, recalling the debate.

“Seeing one-third of House Democrats voting in favour of the bill, I think sent a ringing endorsement by Congress in support of this technology.”

Three major issues

But it has three major issues, he said.

First, it increases the SEC’s power by letting the agency determine whether a particular crypto project is decentralised — power it’s apt to abuse, Cosme said.

Second, it gives the CFTC unprecedented power to regulate spot crypto markets, something the industry could come to regret.

Finally, vague language in the bill could mean that DeFi protocols — which were ostensibly left out of its purview — could mean those protocols will find themselves subject to SEC or CFTC regulation after all.

“This exception for DeFi actually isn’t that robust,” Cosme said.

‘Absolute power’

Under the bill, crypto assets that are sufficiently decentralised would be considered commodities, like gold or wheat.

Assets that don’t pass the decentralisation test would be considered securities, like stocks or bonds, and would be subject to more rigorous SEC oversight.

But the SEC would be the one to make that determination, a problem for an industry that considers SEC Chair Gary Gensler a mortal enemy. Gensler has long said the vast majority of digital assets are securities.

“With this SEC right now, I would bet that the SEC would reject every single request for a decentralisation certification,” Cosme said.

“It gives them absolute power to reject any token from going into CFTC land.”

Even a more crypto-friendly SEC might be hard-pressed to classify tokens as non-security commodities.

“The overwhelming majority of useful tokens in crypto ecosystems right now probably, at least arguably, qualify as one of the nonexempt [security] categories,” Lindgren, of LLOY, said. That includes stablecoins and “anything that can be staked or earn revenue in any way.”

In any case, crypto companies might not like what’s waiting for them in “CFTC land,” Lindgren said.

That’s because the bill gives the CFTC control over spot crypto markets. Digital assets would be the only commodity subject to such scrutiny, according to the attorneys.

The CFTC now actively regulates the markets for derivatives of commodities, such as wheat and oil futures. But it has little oversight of spot commodity markets.

“They have what’s called market manipulation, fraud jurisdiction over spot commodities,” Cosme said, “but that’s only because if you commit fraud or market manipulation on a spot commodity, then you’re going to impact the derivative of it.”

‘It would be a huge barrier to entry for new entrants versus incumbents.’

—  Alexander Lindgren, LLOY Law LLP

Under the bill, companies like crypto exchange Coinbase would likely have to register with the CFTC, even if they refrain from offering crypto derivatives.

“When you’re registering as an intermediary with the CFTC and with the appropriate self-regulatory organisation, you are undertaking a lot — A LOT — of ongoing compliance, reporting, and cost burden,” Lindgren said.

“It would be a huge barrier to entry for new entrants versus incumbents, because you’re moving more into bank-like compliance territory.”

DeFi caught in the mix

Moreover, the CFTC requires intermediaries in the derivatives markets that it currently regulates. That is a problem for the world of decentralised finance, where applications are designed to eliminate the need for an intermediary and to let users conduct peer-to-peer transactions.

“Any of the transactional activity covered by the law needs to occur on a platform that is centralised, intermediated, regulated, and reporting,” Lindgren said.

“You’re probably just increasing the likelihood and frequency of enforcement actions against DeFi platforms by the CFTC.”

Nevertheless, the bill’s passage is one of several recent events that suggest the US is softening its anti-crypto stance.

In another bipartisan move in May, Congress voted to scrap a policy called SAB 121. Among other things, the end of SAB 121 would have made it easier for big banks such as JPMorgan Chase, BNY Mellon, and State Street to hold crypto on customers’ behalf. President Joe Biden vetoed the bill.

A week later, the SEC shocked ETF watchers when it approved spot Ether exchange-traded funds.

And if crypto advocates squint, there are things in the bill they might like.

For example, it makes it possible to launch new tokens “in a compliant way, which obviously will then provide a little bit more legitimacy,” Cosme said. “Current token launches aren’t illegal per se, they’re just in this legal grey area.”

Lindgren thinks its merits are simpler than that.

“There’s an argument to be made that, ‘Hey, even a deeply flawed bill is better than everyone suing everybody,’ which is where we’re at,” he said.

Aleks Gilbert is a DeFi Correspondent at DL News. Got a tip? Email him at