FIT21 is the first digital asset legislation in United States history to pass in either chamber of Congress — the House of Representatives, in this case.

It did so with strong bipartisan support; 71 Democrats joined 208 Republicans to pass the legislation by a two-to-one margin.

“Last week’s overwhelmingly bipartisan passage of FIT21 was symbolic. It shows that both parties are willing to come together and that Congress, not the SEC, should make policy,” Kristin Smith, CEO of the Blockchain Association, told Cointelegraph.

It also suggests the political winds in Washington, D.C., could be changing. “The crypto industry is more organized than ever before — and we now have all of the pieces in place to advocate for smart policy,” added Smith.

In a May 22 press release, the U.S. House of Representative’s Financial Service Committee described the passage of FIT21 as a “watershed moment for the U.S. digital asset ecosystem.”

Not only did FIT21 receive larger bipartisan support than even its strongest proponents expected, but a third of House Democrats, including Speaker Emerita Nancy Pelosi, supported it.

However, this happened almost concurrently with the Securities and Exchange Commission’s (SEC) “change of heart on Ether,” Zach Zweihorn, a partner at law firm Davis Polk, told Cointelegraph.

The agency approved Ethereum spot-market exchange-traded funds on May 23, a dramatic turnaround in its own right.

Also significant was the Congressional Review Act vote on May 16 to overturn Staff Accounting Bulletin 121, which “received 60 votes in the Senate, including from prominent Democrats like Chuck Schumer,” added Zweihorn.

This makes it easier for highly regulated financial institutions and firms to act as custodians of digital assets.

Dual-agency crypto regulation

However, one potential friction point with FIT21 is its “dual agency” regulatory regime. Digital assets will be regulated by either the SEC or the Commodity Futures Trading Commission (CFTC), depending on the decentralization of their underlying networks or projects. 

The commodities regulator would supervise decentralized assets like Bitcoin (BTC), while the SEC might regulate tokens used to raise capital for new digital projects (e.g., initial coin offerings), which are more like traditional securities.

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“Having two regulators [the SEC and the CFTC] can cause confusion for market participants. We hope to see the Senate further explore this issue as they look to draft their own legislation,” said Smith.

Some saw merit in the dual-agency structure but only as it would further restrict what is viewed as the SEC’s stifling effect on crypto and blockchain innovation.

“FIT21 should help curtail some of the SEC’s authority over the crypto space,” Kadan Stadelmann, chief technology officer of Komodo, told Cointelegraph. “At the moment, the SEC under [Chair Gary] Gensler has too much control, and its decision-making has thwarted blockchain innovation in the United States.”

The legislation’s framework “takes the first step of saying there should be a limiting principle that cabins [i.e., restricts] SEC jurisdiction, which is more clarity than we’ve gotten from Chair Gensler’s limitless and lawless approach,” Jack Solowey, fintech policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, told Cointelegraph.

Admittedly, regulating digital assets is no easy matter. For one thing, they can change their form and function over time, as Matthew Le Merle, co-founder and managing partner at Blockchain Coinvestors, told Cointelegraph:

“As just one example, a token could begin as a security and transition to being a commodity as the network becomes decentralized.”

In another example, Polkadot’s native Polkadot (DOT) coin “was initially offered, sold and delivered to purchasers as a security,” but later evolved or “morphed and no longer is a security. It is software,” according to the Web3 Foundation.

“The way the bill works, the same token may at the same time be a restricted digital asset, subject to SEC jurisdiction, and a digital commodity, subject to CFTC jurisdiction — depending on factors such as how it was acquired or who holds it. That raises a lot of complexity,” said Davis Polk’s Zweihorn

For a token to come under CFTC jurisdiction, the underlying project has to be certified as a “decentralized system,” continued Zweihorn. ”There’s a very detailed and complex definition of what constitutes a decentralized system, and some of the necessary elements can be ambiguous.”

The SEC is the agency that gets to decide — subject to judicial review — whether a system has become decentralized, added Zweihorn. Based on history, one might expect the SEC to continue “to take a very narrow view of what constitutes a system being decentralized.”

Perhaps this is why not everyone in the crypto community celebrated FIT21’s passage. Crypto-related attorney Gabriel Shapiro declared that legislation would still give the SEC “huge power” in U.S. crypto regulation.

Still, “Most cryptocurrencies would be considered commodities by default,” George Shakro, associate attorney at Gordon Law, wrote on May 28. However, to remain a commodity under CFTC jurisdiction, a token could not be under the unilateral control of a single person or entity for at least 12 months. Shakro added:

“If an individual or entity owns five percent or more of the asset’s total supply, it could be classified as a security instead.”

“If FIT21 becomes law, there will be a new statutory test of ‘decentralization,’” added Zweihorn. Of course, that new test will be open to different interpretations, “and I suspect there would be a lot of disagreement as applied to particular assets.”

In any case, many agree with Stadelmann that “some sort of comprehensive crypto regulation is needed in the United States. The European Union, Switzerland, Singapore and the United Arab Emirates are pulling ahead. Due to unclear regulations, U.S. citizens have less access to various crypto products and services. This puts both crypto companies and users at a disadvantage.”

Politicians are listening to crypto holders

On the other hand, FIT21 is really more a framework than a finished blueprint for crypto supervision, and perhaps specifics can be negotiated at a later time. Indeed, one big takeaway from FIT21 could be that U.S. politicians who ignore crypto now do so at their own peril.

Variant Funds Jake Chervinsky, for instance, asserted that FIT21, with its strong Democratic backing, was “sending a message to the Biden administration that ‘anti-crypto’ is a losing platform this year.”

Maybe such a claim is going too far?

“It is not going far enough. The future of America is dependent upon us having a position of leadership in a rapidly digitizing world — most other nations are now ahead of us in this regard,” responded Le Merle. “The so-called ‘anti-crypto army’ of [U.S. President Joe] Biden and [Senator Elizabeth] Warren has deeply damaged U.S. competitiveness and innovation while behaving in capricious and arbitrary if not illegal ways.”

A recent Blockchain Coinvestors report predicted that digital asset regulation will be a key U.S. electoral issue for the first time in 2024, “especially among politicians looking to attract the votes of digital natives.”

“We’re seeing a swell of support from everyday users; the more than 50 million Americans who own or invest in crypto are more active and vocal than ever before — and it’s clear that Washington is listening,” said the Blockchain Association’s Smith.

“At the very least, the idea among certain progressives that an anti-crypto stance would only have electoral upside, and no electoral downside, is being seriously called into question,” added the Cato Institute’s Solowey.

Could FIT21 become law in 2024?

What are the chances that FIT21, or some form thereof, could be signed into law in 2024, a U.S. election year?

“Never say never, but it would be a big lift to get FIT 21 through the Senate this year, given the limited time left on the legislative calendar in an election year,” said Solowey.

“It has a decent chance of passing,” opined Stadelmann. “Looking at the polls, Democrats see they are losing to Republicans in many key battleground states. In an attempt to win over Independents, Democrats are starting to pivot and take a more pro-crypto approach.”

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According to recent polling from DCG and The Harris Poll, one in five voters in swing states consider cryptocurrency a major issue in the election, added Smith.

It could be a good sign, too, that President Biden didn’t threaten to veto the FIT21 legislation while saying he was willing to work with Congress on a “comprehensive and balanced regulatory framework for digital assets,” said Zweihorn. “It may mean there’s room for negotiation to get to a workable legislative solution.”

All in all, “there certainly seems to be shifting winds,” commented Zweihorn, though FIT21 still faces an uphill climb in the Senate. But, in light of the 60 votes in the Senate in the recent SAB 121 disapproval resolution, “it’s not impossible.”