What is Financial Innovation and Technology for the 21st Century Act
The Financial Innovation and Technology for the 21st Century Act (shortened as FIT21) was proposed by Republican House Financial Services Committee members and the Agriculture Committee on July 20, 2023. It passed the votes of the two House committees on July 26 and 27, respectively.
FIT21 aims to establish a regulatory framework for the digital asset market in the U.S., providing clear rules for market participants and protecting investors and consumers.
Prominent backers of the FIT21 include the Chairman of the House Agriculture Committee (Glenn “GT” Thompson) and the Chairman of the House Financial Services Committee (Patrick McHenry). The bill has received support from Republicans and cryptocurrency enthusiasts. Patrick McHenry publicly stated that it was the first time a committee was marking up crypto-specific legislation, affirming that legislation is necessary to prevent the U.S. from “falling behind” other countries in regulating crypto. CoinBase CEO, Brian Armstrong, also supported the bill before the vote. Brian sees this as a vote to protect cryptocurrency, U.S. innovation, and security.
Clarifying the Jurisdiction of CFTC and SEC
The bill proposes that digital assets be jointly managed by the CFTC and SEC, with the CFTC taking the lead and the SEC playing a secondary role. The bill categorizes digital assets into digital commodities, restricted digital assets, and payment stablecoins. Digital commodities are under CFTC's jurisdiction, while restricted digital assets are under SEC's. Payment stablecoins can be traded on both SEC and CFTC regulated venues, but neither has the right to regulate stablecoins or their issuers.
What are digital commodities? The bill stipulates that when a digital asset's related blockchain network meets two conditions, it is considered a digital commodity: 1) A functional network, and 2) Decentralization. A functional network means that digital assets can be used on the network for value transfer and storage, participation in services or applications, and governance. Decentralization means no individual or entity can unilaterally control the blockchain. If a digital asset doesn't meet these conditions, it's deemed a restricted digital asset.
Similarly, the bill differentiates intermediaries into digital commodity intermediaries and digital asset intermediaries. The former needs to register with the CFTC and be subject to its regulation, while the latter must register with the SEC.
Disclosure and Consumer Protection
For digital assets and their related blockchain systems, the bill mandates the disclosure of source code, transaction records, economic models, development plans, associated entities and personnel, and risk factors.
Intermediaries must prove to the CFTC that they are not involved in market manipulation before offering their services and must register with a specific futures association. Once registered, intermediaries must meet various requirements set out by the bill, such as adhering to business conduct standards, meeting minimum capital requirements, ensuring fair trading, segregating client assets, disclosing operational details, books and records, conflicts of interest, etc.
No Registration Required for Ancillary Activities
The bill explicitly states that individuals involved in ancillary blockchain operations, such as network validation, node management, providing API/RPC services, developing, maintaining, or managing blockchain systems, do not need to register with regulatory bodies. The regulator can punish violations.
Policy and Regulation
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