Key Insights:
CFTC would be responsible for regulating decentralized blockchains (and crypto).
SEC would regulate centralized crypto.
Greater than 20% holding with any single entity or person would classify a crypto as centralized.
Crypto exchanges have been subjected to dual regulation to avoid two sets of laws.
Stablecoins have been kept out of the FIT-21 act and would likely be governed by a separate act.
In a historic move, the US Congress has passed the Financial Innovation Technology Bill which seeks to establish the US as one of the top crypto innovation hubs. The bill was brought by a bipartisan effort and was passed three days ago.
Also, it is expected that the bill will not be vetoed by US President Joe Biden. Earlier, there were unconfirmed rumors that the president might veto the bill if it is passed by the US Congress.
The bill was also supported by top office bearers in the US Congress such as Representative French Hill who is the Chairman of the Subcommittee on Digital Assets.
In its current form, the bill might end the competition to regulate crypto between various US agencies. It would therefore act to reduce the animosity towards exchanges, crypto-based companies and crypto innovators.
The Financial Innovation and Technology Act for the 21st Century (FIT-21) seeks to distribute regulatory powerd over digital assets such as cryptocurrencies and blockchains.
No guidelines were established for the regulation of stablecoins or NFTs.
The FIT-21 Act seeks to distribute regulatory powers among authorities within the US government. Earlier there was an invisible competition among the CFTC and the SEC.
The CFTC which is responsible for regulating the US commodity markets termed cryptocurrencies such as Bitcoin as commodities, similar to gold.
On the other hand, the SEC sought to categorize them as securities. Before the Ethereum ETF approval, the SEC even hinted that it considers Ethereum as a security, changing its stance from its earlier position. Previously in 2018, the SEC Director William Hinman stated Bitcoin and Ethereum were not securities.
The FIT Act distributes regulatory powers between the SEC and CFTC based on "decentralization". The criteria for decentralization would be that a blockchain (cryptocurrency) needs to have less than 20% of its token supply with the largest holder. This holder could be an individual or a legal entity such as a foundation, trust, LLC or company.
The CFTC has been granted the power to regulate decentralized blockchains in a way similar to commodities. Bitcoin, Ethereum, and XRP have been legally proven to fall in this category. Bitcoin and Ethereum have no concentration of supply while XRP has a judicial verdict in its favor.
The SEC was almost successful in regulating the entire crypto market. However, it lost the ability to regulate them due to two major factors.
Firstly, former SEC Director William Hinman stated that Bitcoin and Ethereum were not securities. He also added that these two cryptocurrencies were sufficiently decentralized.
Secondly, the first Ripple vs SEC case resulted in a win by Ripple. The District Court of the Southern District of New York, through its Judge Analisa Torres, gave a verdict that the retail sales of Ripple were "not securities" as they did not pass the Howey Test.
The FIT-21 Act has finally set clear boundaries for the SEC. As per the act, those cryptocurrencies and blockchains which are not decentralized would be regulated by the SEC.
In a few cases, there are provisions for a joint regulation. One such area is the regulation of crypto exchanges. Since crypto exchanges trade both "centralized" and "decentralized" securities, joint regulation was the only way forward.
As per the act, SEC and CFTC would be liable to set forth rules and regulations in a manner that would not trouble exchanges from dual set of rules.
There were no provisions for the regulation of stablecoins. The act excludes both CFTC and SEC from regulating stablecoins except in cases where there is a case of fraud or involvement of any exchange.
In the US, the stablecoins are regulated by state laws such as by the Department of Financial Services of New York which mandated Paxos to stop the minting of BUSD stablecoin.
Partially, stablecoins are also governed by the Bank Secrecy Act.
However, recently there has been a bipartisan bill called the Lummis-Gillibrand Payment Stablecoin Act. The act supersedes an earlier act called the Responsible Financial Innovation act, which was also drafted by the duo.
Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.