Lawmakers on Capitol Hill are well aware that virtual assets have value. They vividly remember FTX, the cryptocurrency exchange platform that collapsed in November 2022 due to mismanagement. Billions of dollars of investment vaporized along with it.
"Here in Congress we're supposed to be in the problem-solving business and, my goodness, are we having problems in the digital asset space?" said Rep. Dusty Johnson, R-S.D., subcommittee chairman of basic products. markets, digital assets and rural development, he said on Wednesday. โIn recent years we have seen the FTX debacle under a regime that does not work today. โWe are the only country in the G7 that has not yet realized this.โ
On Wednesday, the House of Representatives voted 279-136 in favor of a bipartisan bill to clarify the murky answer to the central question of digital asset regulation: Who has the authority to regulate what? Seventy-one Democrats voted along with 208 Republicans to approve the bill.
The Financial Innovation and Technology Law for the 21st Century (FIT21) aims to define when a digital asset is considered a security and when it is a commodity, as well as which regulatory body has the ultimate authority. If passed by the Senate and signed into law by President Joe Biden, FIT21 would become the first major bill in Congress that would address the regulation of digital assets.
A security is an investment contract in which the investor expects to earn profits through the work of a third party, such as owning shares of a company. Commodities, on the other hand, are basic goods that can be traded or exchanged. Digital assets like bitcoin can fit both definitions because buyers sometimes invest in the value of bitcoin, but also trade bitcoin itself.
One of the bill's Democratic architects, Rep. Wiley Nickel, D-N.C., told me that clarification between the two has been a long time coming.
"We need to address regulatory loopholes and protect consumers," Nickel said. โRight now, we have significant regulatory uncertainty. Nobody knows what the rules are. We are operating under a 100-year-old securities law. Congress has never acted on this.โ
The bill establishes a clear test for digital assets: for decentralized blockchain assets of which no user controls more than 20 percent, the bill considers them commodities and assigns their regulation to the Futures Trading Commission of Commodities (CFTC). Digital assets of which one person or group controls more than 20 percent are considered securities and entrust their oversight to the Securities and Exchange Commission (SEC).
The bill would also establish requirements for the purchase and exchange of digital assets directly from companies or between digital asset holders.
โIt provides clarity to investors and innovators,โ Rep. Patrick McHenry, R.N.C., another of the bill's main architects, said on the House floor moments before the vote.
But not all lawmakers believe the bill does enough to manage a rapidly growing set of assets that often escape conventional terminology and treatment.
Rep. Maxine Waters, D-Calif., argued that the bill could have done more to tighten regulatory loose ends. She cautioned that the CFTC and SEC do not have the same enforcement powers. The CFTC has a considerably smaller workforce: just 677 employees, according to the US. Equal Employment Opportunity Commissionโcompared to the SEC's 4,500 employees.
โThis bill would deregulate a substantial portion of the crypto industry, removing it from the purview of the SEC and allowing it to operate under a lighter regulatory regime under the CFTC,โ Waters said.
Due to their decentralized nature, the largest and most prolific digital assets, such as bitcoin and ethereum, would fall under the CFTC's purview as commodities.
Waters also warned against exceptions in the bill and the possibility of a โregulatory no man's land without a primary regulator.โ That gray area, Waters argued, arises from Title II of the bill, a part that establishes exceptions to the regulatory framework.
While the bill clarified the regulation of the issuers of the assets themselves, any transaction of a product with third parties will largely not fall clearly under the regulation of either the CFTC or the SEC. Waters believes there is still a sizable portion of the digital market that will remain untouched.
"But the bill does not provide an alternative legal framework for these assets," Waters said. "This represents an extreme libertarian approach to MAGA."
The bill now moves to the Senate, where it faces an uncertain fate.
