The 2024 US election has finally come to an end. Trump, who has received much attention and support from the crypto industry, has returned to the White House. I wonder if your circle of friends was flooded with his posts. Unlike the previous administration, his return to the White House this time may bring a more friendly and favorable regulatory policy environment to the crypto industry.
*Image source: X.com
During the election, "strange moves" such as BTC strategic reserve, Americanization of mining, and removal of the current chairman of the SEC were frequently made. However, the key law that will affect the development of crypto assets and Web3 projects in the next few years is the Financial Innovation and Technology for the 21st Century Act (FIT21). Currently, the bill has been passed by the U.S. House of Representatives with a high vote of 279:136, and it is very likely to be quickly passed by the Senate and become law after Trump takes office.
We all know that most Web3 projects, after growing large, choose to establish foundations to comply with local and global regulations. So, what impact will the FIT21 Act have on Web3 projects, especially Web3 foundations? First, let Mankun Lawyers outline the core of FIT21.
FIT21 Act: Redefining Crypto Assets
The FIT21 Act, led by the Republican Party, addresses the long-standing concerns of the crypto industry regarding regulatory uncertainty while outlining clearer regulatory boundaries for the crypto industry and attempting to reduce potential market chaos from the source. The most notable aspect of this act is the redefinition of which crypto assets can be classified as 'commodities' rather than 'securities', a classification that directly determines the type of regulation these assets will be subject to.
To achieve this goal, the FIT21 Act establishes three core criteria to help define the nature and regulatory scope of assets:
20% token control red line
The FIT21 Act stipulates that if any single entity or related party controls more than 20% of the token proportion, the project will be classified as a security and must comply with SEC's strict regulations. The original intention of this regulation is to prevent the market from being manipulated by a few large holders.
For those projects wishing to be recognized as 'commodities' and obtain more lenient regulation, this '20% cap' serves as both a limitation and a compliance guide. Project teams need to design a reasonable token distribution plan to ensure that control is spread among numerous holders, forming a distributed governance model rather than being controlled by a small core team.
Decentralized governance structure
The FIT21 Act's requirements for 'decentralized governance' are equally strict, aiming to ensure that the project's decision-making mechanism truly achieves 'decentralization'. This involves not only the dispersion of control but also the transparency and independence of governance. For example, projects need to introduce a public and transparent voting mechanism, allowing token holders to genuinely participate in key decisions. In this way, governance is not merely superficial decentralization, but involves substantial public participation.
Moreover, the act also proposes standards for the transparency of governance structures. In simple terms, project teams need to publicly disclose key governance rules and processes, such as the conditions for executing major decisions or the triggering rules for codes, so that token holders can clearly understand the operation of the project and reduce the possibility of the core team engaging in 'behind-the-scenes operations'. Such a transparent governance structure can win more user trust for the project and is also an effective means of compliance.
Information disclosure and transparency requirements
The FIT21 Act's requirements for information disclosure are relatively flexible, providing different disclosure standards based on the level of decentralization and the nature of the project. For projects that meet decentralization requirements and are categorized as 'commodities', the act allows them to enjoy relatively relaxed information disclosure obligations, but key financial information, token distribution status, and community governance proposals must still be regularly made public to ensure transparency. In contrast, projects viewed as securities are required to conduct comprehensive financial disclosures regularly, similar to traditional securities, to ensure investors' right to know.
At the same time, in addition to establishing standards, the FIT21 Act humanely introduces a 'safe harbor' clause, providing key compliance transition periods for crypto projects. For those projects that have not yet fully achieved decentralization, as long as the project team commits to meeting decentralization standards within a specified time, they can continue operating during the exemption period without being subjected to strict securities regulation. This clause grants project teams time to gradually improve their governance structure and community management, reducing short-term adjustment risks arising from compliance pressure. This flexible buffer mechanism not only protects the innovative space of project teams but also ensures their long-term compliance direction, creating a stable policy environment for the healthy development of the crypto industry.
So, in the context of the imminent legislative effect of the FIT21 Act, how should Web3 projects respond in terms of token governance and organizational structure?
Mankun Lawyers have long recommended and assisted Web3 project teams in establishing foundations to ensure global compliance (for support, please add Mankun customer service: MankunLawFirm). Meanwhile, they have also written multiple articles sharing the advantages and establishment plans for setting up foundations, such as (Web3 Project Compliance: Why Choose Cayman Foundation for Token Issuance?) (Vitalik's Selection: Why Choose Swiss Foundation for Web3 Token Issuance?).
So, after establishing the foundation, how can this organizational structure comply with the decentralized standards of the FIT21 Act? Coincidentally, the Ethereum Foundation (EF) released its 2024 annual report. Mankun Lawyers interprets this.
Three key points of the Ethereum Foundation's 2024 report
The Ethereum Foundation's 2024 annual report, totaling 27 pages, is succinct yet information-rich. From organizational structure to treasury funds, to annual expenditures, this report from the Ethereum Foundation clearly discloses all, giving us a glimpse into the structure and current status of the world's largest Web3 foundation.
Mankun Lawyers particularly remind: For Web3 projects wishing to establish foundations, this report serves as a compliance 'model room'. Next, in conjunction with the FIT21 Act, we will break down the compliance path that the Ethereum Foundation has taken in response to regulation; please 'take good notes'.
Decentralized governance
The Ethereum Foundation's 2024 annual report details the functions and divisions of several key teams, including the development team, research department, ecosystem support team, and risk management group. These teams operate independently and supervise each other, with clear divisions not only in technical development and project support but also in governance structure, showcasing the foundation's commitment to decentralization. For instance, the development team focuses on technical upgrades of the core protocol, the research department is responsible for future innovations, while the ecosystem support team promotes community education and ecological expansion. These functional divisions prevent decision-making power from being overly concentrated in a single team, ensuring the decentralization of governance.
In addition, the foundation also decentralizes some key decision-making power to token holders and ecosystem participants through community voting and open proposals, allowing the community to genuinely participate in the project's future development. This way, not only are the team's functional boundaries clear, but governance also remains transparent and community-based. Such a governance model fundamentally aligns with FIT21's requirements for decentralization, reducing the risk of manipulation by a single controlling party and providing assurance for the project's long-term healthy development.
Treasury fund holdings
The Ethereum Foundation's 2024 annual report discloses its current treasury fund holdings. The data shows that the Ethereum Foundation currently holds $788.7 million in crypto assets, of which 99.45% is ETH, translating to a total ETH value of about $784.4 million. Based on current ETH market data, the Ethereum Foundation holds approximately 261,000 ETH, accounting for about 0.22% of the total ETH supply.
This data indicates that the Ethereum Foundation's ETH holding ratio remains relatively low, avoiding excessive market impact and alleviating liquidity pressure from concentrated holdings, significantly below the FIT21 Act's 20% red line, ensuring that under the new law, ETH no longer faces SEC scrutiny as a security issue. In addition to crypto assets, the Ethereum Foundation also holds approximately $300 million in traditional financial assets, such as fiat currencies and bonds, ensuring its risk resistance amid market fluctuations.
This diversified fund management approach not only increases financial robustness but also demonstrates the Ethereum Foundation's emphasis on decentralization and transparency. This 'lightweight holding + diversified allocation' financial strategy also provides an important reference for other Web3 projects: while promoting ecological development, ensure long-term financial support through reasonable allocation, laying a solid foundation for achieving more resilient growth in a constantly changing regulatory environment.
Annual financial data
The Ethereum Foundation's 2024 annual report provides a detailed disclosure of its financial situation over the past two years, clearly showing the fund usage and management status between 2022 and 2023. The data indicates that the foundation's expenditures are mainly focused on three major areas: core development, ecosystem funding, and operational reserves, covering aspects such as core protocol security upgrades, ecological support, and risk management.
Specifically, the report shows that the Ethereum Foundation made significant investments in core protocol development over the past year, including the research and development of emerging technologies such as Layer 2 scaling technology and zero-knowledge proofs, to maintain the innovation and security of the Ethereum network. In addition, the foundation has increased funding for the ecosystem, supporting developer communities and various new projects' incubation, thereby promoting the long-term development of the Ethereum ecosystem. These funding programs cover new project incubation, education and training, and community activities, providing momentum for the sustainability of the Ethereum network.
The Ethereum Foundation's open and transparent fund management strategy aligns with the FIT21 Act's requirements for financial disclosure, providing strong compliance references for the future development of the Web3 industry. Additionally, such full transparency in data disclosure helps build market trust, laying the groundwork for the project's sustainable development in terms of compliance and resilience.
Mankun Lawyers' suggestions
Currently, with Trump's rise to power, the FIT21 Act seems to have reached a point of 'firm resolution'. Just like the EU MiCA Act's impact on global crypto asset regulation, once the FIT 2 Act is officially passed by the Senate and legislated, it will undoubtedly have a crucial impact on the classification of global crypto assets. Therefore, whether for those wanting to establish a foundation or those already established and considering compliance regulation, the Ethereum Foundation's 'homework' is worth emulating.
Reasonable token allocation, ensuring the implementation of decentralized governance
The 20% control red line proposed by the FIT21 Act requires many projects to be more prudent in their token distribution. Therefore, it is crucial to design a reasonable token distribution plan during the initial stage of the project. By introducing multi-party governance mechanisms, such as token holder voting and community proposal management, decision-making power can be gradually decentralized to community members. This transparent governance model not only helps projects meet the FIT21 decentralization standards but also significantly enhances community participation, laying a solid support foundation for the project.
Decentralized fund holding, enhancing financial robustness
The Ethereum Foundation's diversified fund allocation is a typical robust strategy, not limited to holding crypto assets but also covering traditional financial instruments like fiat and bonds. Web3 project teams can also refer to this diversification in fund management to avoid concentrated holdings of a single asset, especially the market volatility risks caused by highly volatile crypto assets. By flexibly allocating, project teams can maintain sufficient liquidity and risk resistance amid market fluctuations, ensuring financial stability and providing reliable support for the project's long-term development.
Emphasizing information disclosure and transparency construction
Under the FIT21 framework, information disclosure has become one of the key factors affecting project compliance. Web3 projects should proactively disclose information about the flow of funds, token distribution, governance mechanisms, etc. They can refer to the Ethereum Foundation's disclosure method by regularly publishing key information about project development progress, fund usage, etc., providing reliable reference data for the community and investors. This not only helps with compliance but also enhances community trust and reduces potential legal and reputational risks.
Of course, if you intend to establish a Web3 foundation and wish to achieve compliance from the outset, Mankun Law Firm will be your trusted partner. As a seasoned law firm deeply engaged in the blockchain and new economy sectors, our team has several lawyers with extensive Web3 experience, specializing in foundation location, establishment, and structural design, and has successfully co-organized foundation projects multiple times.
We firmly believe that compliance is not only a protection for the project but also a cornerstone for promoting the stable development of the Web3 industry. If you have relevant needs, feel free to consult Mankun Law Firm at any time; we will be happy to provide compliance consulting and professional guidance to help your project develop steadily and compliantly in the Web3 ecosystem, jointly advancing the Web3 industry towards a more compliant and transparent future.
