What Crypto Issues Will the New U.S. Law Address?
An important regulatory bill concerning cryptocurrencies might receive approval this May. The U.S. House of Representatives is scheduled to vote on the Financial Innovation and Technology Act, known as FIT-21, which could significantly impact the global digital industry.
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Despite the crypto market existing for over a decade, the United States still lacks a coherent regulatory framework. The current policy is fragmented, inconsistent, and unclear, hindering institutional investment into the digital economy and fostering an environment ripe for fraud. However, this could soon change dramatically.
The House of Representatives has resurrected Bill HR 4763, introduced by Glenn Thompson in July 2023. It has been decided that it will be voted on together with the FIT-21 Act, which aims to ensure consumer protection in the digital asset market. These two bills overlap in many areas, but while FIT-21 emphasizes investor protection, HR 4763 focuses on establishing a regulatory foundation.
Commodity or Security?
FIT 21/HR 4763 aims to establish a comprehensive regulatory framework for digital markets in the USA.
A crucial element of this legislation is the definition of the powers of regulators who, over the past five years, have admittedly slowed the development of the cryptocurrency economy. The new law delineates the boundaries of authority between the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) concerning cryptocurrencies. It finally stipulates which digital assets are considered securities and which are commodities.
If a blockchain used for a digital asset is decentralized, the CFTC will regulate the cryptocurrencies operating on it as commodities. A blockchain will be considered decentralized if no issuers or affiliated persons own more than 20% of the digital assets issued on it.
Tokens operating in centralized networks with a vertical management scheme, or tokens from projects where founders (all or any of them) own more than 20% of the assets, will be considered securities. In such cases, the SEC will primarily oversee them.
If the vote is successful, it may signify the end of the “cryptocurrency chaos” era under Gary Gensler's oversight. Now, it seems, to minimize the risk of being accused of selling unregistered securities, founders need only prove that they do not control more than one-fifth of the total supply.
Another significant innovation is consumer protection measures. The proposed bill mandates that the segregation of client funds is a mandatory condition for all crypto exchanges. Thus, the requirement for the separate storage of a platform's own funds and its clients' assets, already present in the European MiCA regulation, will now be obligatory for the American crypto market as well.
This decision seems entirely logical after the collapse of the FTX exchange.
The bill also mandates that issuers of digital assets undergo a mandatory token lock-up period to foster innovation rather than speculation. This effectively prohibits the sale of tokens from “raw” projects and outright “flash-in-the-pan” operations.
Additionally, FIT 21/HR 4763 specifies that the state of the digital market necessitates further disclosure requirements, though it's unclear whether this pertains to cryptocurrency projects or client personal data.
Overall, the bill is a compromise aimed at both encouraging innovation and necessitating the regulation of digital markets. Its passage would establish the clear rules and regulatory framework that all companies aiming to operate transparently have been demanding.
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