Regulation
Crypto applauded FIT21 – here’s why the industry is now ready to fight over the details of the bill – DL News
- Crypto advocates applauded the House’s passage of landmark crypto legislation in May.
- Some players in the sector do not want this to go any further.
- “There are many fundamental problems with the bill,” said a crypto lawyer.
Crypto advocates applauded historic bipartisan bill that sailed by the United States House of Representatives last month. Yet they are prepared to fight tooth and nail to ensure this does not go any further unless massive changes are made.
The bipartisan vote included a significant number of Democrats and indicated that Congress, like the crypto industry, was eager to save digital assets from their legal limbo, according to industry lawyers who spoke with DL News.
Although the industry wanted to accept a symbolic victory, the bill itself would give unprecedented power to regulators who have waged a legal war against crypto, lawyers said.
Radical revision
That’s why some in the industry have said a radical overhaul is needed before going any further.
The Senate is not expected to vote on the bill this year, but could consider the bill, or part of it, during next year’s session.
“What started out as a probably well-intentioned and fairly well-thought-out attempt has been very muddled by numerous contributions over time,” said Alexander Lindgren, an attorney at LLOY Law LLP. DL News.
“There are many fundamental problems with this bill,” he said.
A “resounding approval”
The Financial Innovation and Technology for the 21st Century Act, known as the FIT21 Act, would end the crypto “food fight for control” between the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, according to the representative. Patrick McHenry of North Carolina, co-sponsor of the bill and Republican chairman of the House Financial Services Committee.
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FIT21 establishes definitions for crypto assets and divides responsibility for their regulation between the CFTC and the SEC.
The rules would give the CFTC, seen as more crypto-friendly, more jurisdiction over the sector. The definitions determine whether an asset would be subject to SEC or CFTC oversight.
In a statement after the House vote on May 22, Kristin Smith, CEO of the Blockchain Association, called the bill’s passage “a watershed moment and congressional validation for the crypto industry in the United States.” United “.
Cryptography lawyer Orlando Cosme said he was among those who privately hoped the bill would pass, despite misgivings.
This is due to the way it was worded in the weeks leading up to the House vote.
“If you are pro-crypto, you are going to vote yes on this bill, and if you are against crypto, if you want crypto to die… then you should vote against it,” he said, recalling the debate.
“Seeing a third of House Democrats vote in favor of the bill, I think that sent resounding support from Congress for this technology.”
Three major issues
But that poses three major problems, he said.
First, it increases the power of the SEC by letting the agency determine whether a particular crypto project is decentralized — a power it is likely to abuse, Cosme said.
Second, it gives the CFTC unprecedented power to regulate crypto spot markets, something the industry may come to regret.
Finally, vague language in the bill could mean that DeFi protocols – which were ostensibly excluded from its jurisdiction – could mean that these protocols would find themselves subject to regulation by the SEC or CFTC after all.
“This exception for DeFi is actually not that robust,” Cosme said.
‘Absolute power’
Under the bill, crypto assets that are sufficiently decentralized would be considered commodities, like gold or wheat.
Assets that do not pass the decentralization test would be considered securities, such as stocks or bonds, and would be subject to more rigorous SEC oversight.
But it would be the SEC that would make that decision, which would pose a problem for an industry that views SEC Chairman Gary Gensler as a mortal enemy. Gensler has said a long time the vast majority of digital assets are securities.
“With this SEC right now, I would bet that the SEC would deny every request for decentralization certification,” Cosme said.
“This gives them absolute power to refuse entry of any token into CFTC territory.”
Even a more crypto-friendly SEC might struggle to classify tokens as non-security products.
“The overwhelming majority of useful tokens in crypto ecosystems right now are probably, at least arguably, considered one of the non-exempt tokens. [security] categories,” said LLOY’s Lindgren. This includes stablecoins and “anything that can be staked or generate income in any way.”
Either way, crypto companies might not like what awaits them in “CFTC land,” Lindgren said.
In effect, the bill gives the CFTC control of crypto spot markets. Digital assets would be the only product subject to such scrutiny, according to lawyers.
The CFTC now actively regulates commodity derivatives markets, such as wheat and oil futures. But it exercises little oversight over commodity spot markets.
“They have what’s called market manipulation, spot commodity fraud jurisdiction,” Cosme said, “but that’s only because if you commit fraud or market manipulation on a spot commodity, you will then have an impact on its derivative.”
“This would pose a huge barrier to entry for new entrants compared to 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 register as an intermediary with the CFTC and with the appropriate self-regulatory organization, you undertake a lot – A LOT – of ongoing compliance, reporting and costs,” Lindgren said.
“This would pose a huge barrier to entry for new entrants compared to incumbents, as you are moving more into bank-like compliance territory.”
DeFi caught in the mix
Additionally, the CFTC requires intermediaries in the derivatives markets it currently regulates. That’s a problem for the world of decentralized finance, where applications are designed to eliminate the need for a middleman and allow users to make peer-to-peer transactions.
“Any transactional activity covered by the law must take place on a centralized, intermediated, regulated and reporting platform,” Lindgren said.
“You are likely only increasing the likelihood and frequency of enforcement actions against DeFi platforms by the CFTC.”
Nonetheless, the bill’s passage is one of several recent events that suggest the U.S. softening its anti-crypto stance.
In another bipartisan move in May, Congress voted for deletion a policy called SAB 121. Among other things, ending SAB 121 would have made it easier for major banks such as JPMorgan Chase, BNY Mellon, and State Street to hold cryptocurrencies on behalf of their clients. President Joe Biden vetoed the bill.
A week later, the SEC shocked ETF watchers by approved Ether spot exchange traded funds.
And if crypto proponents are squinting, there are elements in the bill that might please them.
For example, this allows new tokens to be launched “in a compliant way, which will obviously then bring a little more legitimacy,” Cosme said. “The current token launches are not illegal per se, they are simply in this legal gray area.”
Lindgren thinks its merits are simpler than that.
“There’s an argument to be made: ‘Hey, even a deeply flawed bill is better than everyone suing everyone,’ and that’s where we are,” he said.
Aleks Gilbert is a DeFi correspondent at DL News. Do you have any advice? Send him an email to aleks@dlnews.com.