On May 23, 2024, the U.S. House of Representatives officially passed the FIT21 Crypto Act (Financial Innovation and Technology for the 21st Century Act) with 279 votes in favor and 136 votes against. U.S. President Biden announced that he would not veto the bill and called on Congress to cooperate on a "comprehensive and balanced regulatory framework for digital assets."
FIT21 aims to provide a way for blockchain projects to be launched safely and efficiently in the United States, clarify the boundaries of responsibilities between the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), distinguish whether digital assets are securities or commodities, and strengthen supervision of cryptocurrency exchanges to better protect American consumers.
法案原文：IN GENERAL.—The term ‘digital asset’ means any fungible digital representation of value that can be exclusively possessed and transferred, person to person, without necessary reliance on an intermediary, and is recorded on a cryptographically secured public distributed ledger.
The bill defines "digital assets" as an exchangeable digital representation that can be transferred from person to person without relying on an intermediary and recorded on a cryptographically protected public distributed ledger. This definition includes a wide range of digital forms, from cryptocurrencies to tokenized physical assets.
The bill proposes several key elements to distinguish whether digital assets are securities or commodities:
(1) Investment Contract (The Howey Test)
If the purchase of a digital asset is considered an investment and the investor expects to make a profit through the efforts of the entrepreneur or a third party, the asset is generally considered a security. This is based on the standard established by the U.S. Supreme Court in SEC v. W.J. Howey Co., commonly known as the Howey test.
(2) Use and consumption
If a digital asset is primarily used as a medium for consumption of goods or services rather than as an investment in the expectation of capital appreciation, such as tokens that can be used to purchase specific services or products, although in the actual market these assets may also be purchased and held speculatively, from the perspective of design and primary use, it may not be classified as a security, but rather as a commodity or other non-security asset.
(3) Degree of decentralization
The bill specifically emphasizes the degree of decentralization of the blockchain network. If the network behind a digital asset is highly decentralized, with no centralized authority controlling the network or assets, the asset may be more likely to be considered a commodity. This is important because there are key differences between the definitions of "commodities" and "securities," which have an impact on how they are regulated.
The U.S. Commodity Futures Trading Commission (CFTC) will regulate digital assets as a commodity “if the blockchain or digital ledger on which it runs is functional and decentralized.”
The U.S. Securities and Exchange Commission (SEC) will regulate a digital asset as a security “if its associated blockchain is functional but not strictly decentralized.”
The bill defines decentralization as, among other requirements, “no person has unilateral control over the blockchain or its use, and no issuer or associated person controls 20% or more of the ownership or voting power in the digital asset.”
The specific criteria for defining the degree of decentralization are as follows:
Control and Influence: No individual or entity has had unilateral power, directly or by contract, arrangement, or otherwise, to control or materially change the functionality or operation of the blockchain system in the past 12 months.
Ownership Distribution: No individual or entity associated with a digital asset issuer owns more than 20% of the total digital asset issued in the past 12 months.
Voting Power and Governance: No individual or entity associated with the digital asset issuer has been able to unilaterally direct or influence more than 20% of the voting power in the digital asset or related decentralized governance system in the past 12 months.
Code Contributions and Modifications: In the past 3 months, the digital asset issuer or related personnel have not made substantial, unilateral modifications to the source code of the blockchain system, unless these modifications are to address security vulnerabilities, maintain routines, prevent network security risks or other technical improvements.
Marketing and Promotion: The digital asset issuer and its affiliates have not marketed the digital asset to the public as an investment in the past 3 months.
Among these definition criteria, the more rigid ones are the distribution of ownership and governance rights. The 20% boundary line is of great significance for defining digital assets as securities or commodities. At the same time, because of the openness, transparency, traceability and immutability of blockchain, the quantification of this definition standard will become clearer and fairer.
(4) Functions and technical characteristics
The connection between digital assets and the underlying blockchain technology is also one of the important factors in determining the direction of regulation. This connection usually includes how digital assets are created, issued, traded and managed:
Asset issuance: Many digital assets are issued through the programmatic mechanism of blockchain, which means that their creation and distribution are based on preset algorithms and rules rather than human intervention.
Transaction verification: Transactions of digital assets need to be verified and recorded through the consensus mechanism in the blockchain network to ensure the correctness and immutability of each transaction.
Decentralized governance: Some digital asset projects have implemented decentralized governance, where users holding specific tokens can participate in the project’s decision-making process, such as voting on the project’s future development direction.
These characteristics directly affect how assets are regulated. If digital assets primarily provide economic returns through automated processes on the blockchain or allow voting to participate in governance, they may be considered securities because it indicates that investors are expecting to gain benefits through management or corporate efforts. If digital assets function primarily as a medium of exchange or are used directly to obtain goods or services, they may be more likely to be classified as commodities.
How digital assets are promoted and sold in the market is also an important part of FIT21. If a digital asset is marketed primarily through the expected return on investment, it may be considered a security. The content here is extremely important because it regulates the regulatory framework for digital assets and will affect what the next digital asset that may be available through a spot ETF is.
(1) Registration and supervision responsibilities
There are two definitions of digital assets: digital commodities and securities. The bill stipulates that the supervision of digital assets will be jointly responsible by two main agencies, depending on the definition:
Commodity Futures Trading Commission (CFTC): Responsible for regulating digital commodity trading and related market participants.
Securities and Exchange Commission (SEC): Responsible for regulating digital assets that are deemed to be securities and the platforms on which they are traded.
(2) Lock-up period for token insiders
法案原文："A restricted digital asset owned by a related person or an affiliated person may only be offered or sold after 12 months after the later of— (A) the date on which such restricted digital asset was acquired; or (B) the digital asset maturity date." .
The provision requires insiders’ token holdings to be locked up for at least 12 months from the date of acquisition, or 12 months from the defined “digital asset maturity date”, whichever is later.
This ability to delay sales helps prevent insiders from taking advantage of undisclosed information or unfairly influencing market prices. By aligning the interests of insiders with the long-term goals of the project, it helps avoid speculation and market manipulation, helping to create a more stable and fair market environment.
(3) Restrictions on sales of digital assets by related parties
法案原文："Digital assets may be sold by an affiliated person under the following conditions: (1) The total volume of digital assets sold by the person does not exceed 1% of the outstanding volume in any three-month period; (2) the affiliated person must immediately report to the Commodity Futures Trading Commission or the Securities and Exchange Commission any order to sell more than 1% of the outstanding volume."
Digital assets may be sold by related persons in the following circumstances:
The total amount of digital assets sold in any 3-month period shall not exceed 1% of the stock;
An affiliated person must immediately report to the Commodity Futures Trading Commission or the Securities and Exchange Commission any orders to sell more than 1% of the inventory.
This measure ensures market stability and health by limiting the amount of sales by related persons in a short period of time, preventing market manipulation and excessive speculation.
(4) Project information disclosure requirements
法案原文："Digital asset issuers must disclose the information described in Section 43 on a public website prior to selling digital assets under Section 4(a)(8)."
The specific information required by the project disclosure is not detailed in the excerpt provided, but will typically include:
The nature of the digital asset: what the digital asset represents (e.g., shares in a company, rights to future earnings, etc.);
Related risks: potential risks involved in investing in this digital asset. ;
Development Status: The current status of the project or platform related to the digital asset, such as development milestones or market readiness;
Financial information: any financial details or forecasts related to the digital asset;
Management team: Information about the people behind the project or company that issues the digital asset.
The bill requires digital asset issuers to provide detailed project information, including the nature, risks, and development status of the assets, so that investors can make informed investment decisions. This move enhances market transparency and protects the interests of investors.
(5) Principle of safe isolation of customer funds
法案原文："Digital commodity exchanges shall hold customer funds, assets, and property in a manner that minimizes the risk of loss or unreasonable delay in access by customers to their funds, assets, and property."
This regulation requires digital asset service providers to take measures to ensure the security of customer funds and prevent customer fund loss or access delays due to operational problems of the service provider.
(6) Customer funds and company operating funds must not be mixed
法案原文："Funds, assets, and property of a customer shall not be commingled with the funds of the digital commodity exchange or be used to secure or guarantee the trades or balances of any other customer or person."
This means that service providers must strictly separate customer funds from company operating funds to ensure the independence of customer funds, avoid using customer funds for unauthorized activities, and enhance the security and transparency of funds.
In certain operations, such as for settlement convenience, it is allowed to deposit customer funds and funds of other institutions in the same account if it complies with regulations. However, it is necessary to ensure the separate management and proper record of these funds to ensure the safety of each customer's funds and property.
The FIT21 Act also contains many provisions that encourage and support innovation.
(1) Establishment of the CFTC-SEC Joint Advisory Committee
The CFTC-SEC Joint Advisory Committee on Digital Assets was established to:
Advise the Commission on its rules, regulations, and policies related to digital assets;
Further promote regulatory coordination on digital asset policies among the Commissions;
Research and disseminate methods for describing, measuring, and quantifying digital assets;
Study the potential of digital assets, blockchain systems and distributed ledger technologies to improve the operational efficiency of financial market infrastructures and better protect financial market participants;
Discuss the implementation of this bill and its amendments by the Committee.
The goal of this committee is to promote cooperation and information sharing between the two major regulators on digital asset supervision.
(2) Strengthening and expanding the SEC’s Strategic Center for Innovation and Fintech (FinHub)
The bill proposes to strengthen and expand the SEC’s Strategic Center for Innovation and Fintech (FinHub), which aims to:
Help develop the Commission’s approach to technological advances;
Examining financial technology innovations by market participants;
Coordinate the Commission’s response to emerging technologies in financial, regulatory, and supervisory systems.
Its responsibilities are:
Promote responsible technological innovation and fair competition within the Commission, including around financial technology, regulatory technology and supervisory technology;
Providing internal education and training on FinTech to the Commission;
Advise the Commission on financial technology that serves the Commission's functions;
Analyze the impact of technological advances and regulatory requirements on fintech companies;
Provide advice to the Commission on rulemaking or other agency or staff actions related to fintech;
Providing information about the Commission and its rules and regulations to businesses in the emerging fintech sector;
Companies working in emerging technology areas are encouraged to engage with the Commission and obtain its feedback on potential regulatory issues.
FinHub's primary mission is to promote policy development related to fintech and provide guidance and resources to market participants on emerging technologies. It is required to provide Congress with an annual report on FinHub's activities in the previous fiscal year. It is also required to provide documents and information that ensure that FinHub has full access to the Commission and any self-regulatory organization to perform the functions of FinHub. The Commission should establish a detailed record system (as defined in Section 552a of Title 5 of the United States Code) to assist FinHub in communicating with relevant parties.
(3) Establishment of the CFTC Laboratory (LabCFTC)
The bill proposes the establishment of LabCFTC, whose objectives are to:
Promote responsible financial technology innovation and fair competition for the benefit of the American public;
Act as an information platform to inform the Commission of new financial technology innovations;
Provide advocacy to financial technology innovators to discuss their innovations and the regulatory framework established by this Act and regulations promulgated thereunder.
Its responsibilities are:
Provide advice to the Commission on rulemaking or other agency or staff actions regarding financial technology;
Providing internal education and training to the Commission on financial technology;
Provide advice to the Commission on financial technology to strengthen the Commission’s oversight function;
To engage with academics, students and professionals on financial technology issues, ideas and techniques relevant to the activities of this Act;
Providing information to those working in the emerging technology sector regarding the role of the Commission, its rules and regulations, and registered futures associations;
Personnel working in the field of emerging technologies are encouraged to engage with and obtain feedback from the Committee on potential regulatory issues.
Similar to FinHub, LabCFTC’s mission is to promote the formulation of relevant policies and provide technical guidance and exchanges. LabCFTC is also required to provide Congress with a report on its activities every year. It should also ensure that LabCFTC has full access to documents and information from the Commission and any self-regulatory organization or registered futures association to perform LabCFTC’s functions and establish a detailed record system.
(4) Emphasize and strengthen research on decentralized finance, non-homogeneous digital assets, derivatives, etc.
The Commodity Futures Trading Commission (CFCA) and the Securities and Exchange Commission (SEC) should jointly conduct research on innovative content such as decentralized finance (DeFi), non-fungible digital assets (NFTs), derivatives, etc., study their development trends, and evaluate their impact on traditional financial markets and potential regulatory strategies.
In this part, the attitude towards Crypto compliance is basically established. The clearer direction is the research on DeFi and NFT, which means that DeFi and NFT may also usher in gradually clear regulatory strategies in the future.
Although the crypto industry has existed for more than a decade, there is no comprehensive regulatory framework for digital assets globally. The existing regulatory framework is fragmented, incomplete and lacks clarity. This regulatory uncertainty not only hinders the development of innovative businesses, but also provides opportunities for bad actors.
Therefore, the passage of FIT21 is of great significance.
Its passage has an important positive effect on establishing a regulatory environment that supports the development of blockchain technology, and at the same time puts forward relatively clear requirements for protecting the crypto market and consumer safety. Specifically, it includes: clearly specifying that different types of digital assets are regulated by the CFTC or SEC; setting consumer protection measures, such as customer fund isolation, lock-up period for token insiders, limiting annual sales volume and disclosure requirements, etc.
Blockchain technology and digital assets are another epoch-making invention of human civilization after the Internet. They have huge development potential and prospects. We are all trendsetters of the new era by embracing supervision and innovative development.
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