Regulation
Is Washington preparing for crypto? Top U.S. Policy and Regulatory Trends to Watch
Growing political support and the successful bipartisan vote in favor of crypto-focused FIT21 regulations could signal a new era in crypto regulation in the United States.
Over the past couple of years, the crypto industry in the United States has been going through a rough patch. The FTX crash and subsequent regulatory crackdowns by federal and state agencies painted a bleak picture for the industry. Many companies, such as Binance US, Coinbase and Kraken, have been charged and fined by the SEC. Former Binance CEO Changpeng “CZ” Zhao was even sentenced to four months in prison. Others, like Nexo, have chosen to exit the U.S. market entirely.
However, as the crypto market enters a new phase of growth and the presidential election draws closer, the mood is starting to change.
Donald Trump is one of the most visible signs of this transformation. The eccentric ex-president continues his crypto crusade, meeting on Tuesday with Nasdaq-listed bitcoin mining companies CleanSpark Inc. and Riot Platforms. Judging by his subsequent post on the social media platform Truth Social, the meeting went well. “Bitcoin mining could be our last line of defense against a CBDC. Biden’s hatred of Bitcoin only helps China, Russia and the radical communist left. We want all remaining Bitcoins to be MADE IN THE USA!!! This will help us achieve energy dominance,” Trump wrote.
On the Hill, the new pro-crypto trend is also starting to take notice. The House of Representatives recently had a pleasant surprise by passing a bill that many are calling “historic,” FIT21.
The importance of FIT21
The Financial Innovation and Technology for the 21st Century Act (FIT21), passed by a bipartisan vote of 279-136, became the first crypto-focused legislation to receive approval from either other of the houses of Congress. 71 Democrats joined 208 Republicans in this vote, proving that the issue of crypto can truly be a bipartisan prerogative and not exclusively a Republican one.
If FIT21 passes the Senate and becomes law, it will finally establish a framework that clearly defines which cryptoassets are classified as securities (to be regulated by the SEC) and which are considered commodities (to be regulated by the CFTC). Currently, the SEC claims authority over all cryptoassets and routinely pursues crypto companies for issuing or trading “unregistered securities.” Such behavior is considered one of the biggest issues hindering the development of the crypto industry in the United States, and FIT21 could help change it.
The legislation proposes to classify cryptoassets according to the decentralization of their underlying network or project: the tokens of decentralized projects will be considered raw materials, and the securities of centralized projects. A potential loophole for FIT21 is that the SEC will remain the arbiter of decentralization, but with clear guidelines and the ability to openly challenge its decisions, it would be easier for crypto companies to stand their ground. The great thing about FIT21 is that it helps adapt to the changing nature of cryptoassets. A coin issued on a new blockchain, not yet sufficiently decentralized, may initially be considered a security, but as the blockchain matures and decentralizes, it could become a commodity.
SEC vs. Uniswap
SEC Chairman Gary Gensler is, of course, fiercely opposed to FIT21, which threatens to curtail his authority and force the Commission to change its methods. It would also put a stop to some of the SEC’s current cases, such as the attack on Uniswap Labs, the developer of the world’s largest decentralized exchange (DEX).
In April, the SEC issued a notice to Uniswap in Wells, warning the company that it had identified potential violations of U.S. securities law, including being an unregistered securities exchange and that its interface and wallet were unregistered securities dealers. Last month, Uniswap released a 43-page document claiming that the protocol does not meet the definition of an exchange and is therefore not subject to SEC regulation.
Indeed, a DEX is just a set of smart contracts deployed on a blockchain and operating in an automated manner. Uniswap Labs only controls the DEX interface (web page) but does not have access to its users’ funds at any time.
As lawyers on both sides prepare for battle, the political climate is changing. So far, Gary Gensler has enjoyed the support of President Biden. However, if Donald Trump continues to talk about crypto, the incumbent may decide to soften its stance and the SEC may follow. The Uniswap case could be a litmus test for this change in attitude.
The United States is still far from comprehensive crypto regulation, but if this burgeoning pro-crypto trend continues, the country will solidify its leadership role in the sector.