Cryptocurrencies applauded FIT21: here’s why the sector is now ready to fight over the details of the bill – DL News

• Cryptocurrency advocates applauded the House’s passage of historic cryptocurrency legislation in May.
• Some in the industry don’t want it to go any further.
• “There are a lot of fundamental problems with the bill,” said a cryptocurrency lawyer.

Cryptocurrency advocates applauded this important bipartisan bill sailed through the U.S. House of Representatives last month. Yet they are ready to fight tooth and nail to ensure that the situation does not go any further, unless massive changes are made.

According to industry lawyers who spoke to DL News.

While the industry wanted to accept a symbolic victory, the bill itself would give unprecedented power to regulators who have waged a legal war against cryptocurrencies, lawyers said.

Radical revision

Therefore, some in the industry have said that a radical review is needed before advancing further.

The Senate is not expected to vote on the bill this year, but could consider the legislation, or portions of it, in next year’s session.

“What started out as probably a well-intentioned and somewhat well-thought-out effort has been tarnished heavily by a lot of input over time,” said Alexander Lindgren, an attorney with LLOY Law LLP DL News.

“There are a lot of fundamental problems with the bill,” he said.

A “clear approval”

According to the representative, the Financial Innovation and Technology for the 21st Century Act, known as the FIT21 Act, would end the “food fight for control” of cryptocurrencies between the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission. Patrick McHenry of North Carolina, co-sponsor of the bill and Republican chairman of the House Financial Services Committee.

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FIT21 establishes definitions for cryptocurrencies and divides responsibility for its regulation between the CFTC and the SEC.

The rules would grant the CFTC, considered more pro-cryptocurrency, greater jurisdiction over the sector. The definitions determine whether an asset will be subject to SEC or CFTC oversight.

In a statement after the May 22 House vote, Kristin Smith, CEO of the Blockchain Association, called the bill’s passage “a watershed moment and a sign of congressional validation for the cryptocurrency industry in the United States.” United”.

Cryptocurrency lawyer Orlando Cosme said he is among those who privately hope the bill passes, despite doubts.

This is due to the way the proposal was formulated in the weeks before the House vote.

“If you are pro-cryptocurrency, you will vote yes on this bill, and if you are anti-cryptocurrency, if you want cryptocurrency to die… then you should vote against it,” he said, recalling the debate.

“Seeing a third of House Democrats vote in favor of the bill, I think Congress has sent strong support behind this technology.”

Three main questions

But it has three main issues, he said.

First, it increases the SEC’s power by allowing the agency to determine whether a particular crypto project is decentralized — power that tends to be abused, Cosme said.

Second, it gives the CFTC unprecedented power to regulate spot cryptocurrency markets, something the industry may come to regret.

Finally, vague language in the bill could mean that DeFi protocols – which have seemingly been left out of its reach – could mean that such protocols will find themselves subject to SEC or CFTC regulation after all.

“This exception for DeFi is actually not that robust,” Cosme said.

‘Absolute power’

Under the bill, sufficiently decentralized cryptocurrencies would be considered commodities, like gold or wheat.

Assets that fail the decentralization test would be considered securities, like stocks or bonds, and would be subject to more rigorous oversight by the SEC.

But it would be the SEC that would make that decision, a problem for an industry that considers SEC Chairman Gary Gensler a mortal enemy. Gensler has long said the vast majority of digital assets are securities.

“With this SEC right now, I would bet that the SEC would reject every single request for decentralization certification,” Cosme said.

“It gives them absolute power to refuse entry of any token into CFTC territory.”

Even a more cryptocurrency-friendly SEC may have difficulty classifying tokens as non-security assets.

“The vast majority of useful tokens in crypto ecosystems right now probably, at least arguably, qualify as one of the non-exempt tokens [security] categories,” said Lindgren, of LLOY. This includes stablecoins and “anything that can be staked or generate revenue in any way.”

In any case, crypto firms may not like what awaits them in “CFTC land,” Lindgren said.

This is because the bill gives the CFTC control over spot cryptocurrency markets. According to lawyers, digital assets would be the only commodity subject to such control.

The CFTC now actively regulates commodity derivatives markets, such as wheat and oil futures. But it has little oversight of spot commodity markets.

“They have what’s called market manipulation, spot commodity fraud jurisdiction,” Cosme said, “but that’s only because if you commit fraud or market manipulation on a spot commodity, then you’re going to impact its derivative”.

“It would be a huge barrier to entry for new entrants compared to incumbents.”

—Alexander Lindgren, LLOY Law LLP

Under the bill, companies like cryptocurrency exchange Coinbase would likely have to register with the CFTC, even if they refrain from offering crypto derivatives.

“When you register as an intermediary with the CFTC and the appropriate self-regulatory organization, you are putting in a lot of effort – A LOT – in terms of ongoing compliance, reporting and cost burdens,” Lindgren said.

“It would be a huge barrier to entry for new entrants compared to incumbents, because we are increasingly moving into banking-like compliance territory.”

DeFi involved in the mix

Additionally, the CFTC requires intermediaries in the derivatives markets it currently regulates. This is a problem for the world of decentralized finance, where applications are designed to eliminate the need for a middleman and to allow users to make peer-to-peer transactions.

“Any transactional activity covered by the law must occur on a centralized, brokered, regulated and reporting platform,” Lindgren said.

“You are likely just increasing the likelihood and frequency of enforcement actions against DeFi platforms by the CFTC.”

However, the bill’s passage is one of several recent events that suggest the United States is softener his anti-cryptocurrency stance.

In another bipartisan move in May, Congress voted for scrapping a policy called SAB 121. Among other things, ending SAB 121 would have made it easier for big banks like JPMorgan Chase, BNY Mellon and State Street to hold cryptocurrencies on behalf of customers. President Joe Biden vetoed the bill.

A week later, the SEC shocked ETF watchers approved Ether spot exchange-traded funds.

And if cryptocurrency advocates squint, there are things in the account they might like.

For example, it allows new tokens to be launched “in a compliant manner, which will obviously then provide a little bit more legitimacy,” Cosme said. “The current token launches are not illegal per se, they are just in this legal gray area.”

Lindgren believes its merits are simpler than that.

“There’s an argument to be made: ‘Hey, even a deeply flawed bill is better than everyone suing everyone,’ and that’s where we’re at,” he said.

Aleks Gilbert is a DeFi correspondent at DL News. Do you have advice? Send him an email at aleks@dlnews.com.

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