Written by 0xjs & kimi

The U.S. Congress is about to vote on the latest encryption bill. On May 10, 2024, the U.S. House Rules Committee said that the U.S. House of Representatives will vote unanimously on the Financial Innovation and Technology for the 21st Century Act (FIT21) this month.

Dixon, partner of A16Z, said in a post on May 15, "In the next two weeks, the House of Representatives will vote on FIT21, the most important encryption bill to date." We've long called for clear regulation to protect consumers and innovation, and the FIT21 bill will do just that. Americans have embraced digital assets, but current regulatory approaches often limit innovation and privacy without really addressing the solutions needed to protect consumers or combat illegal activity. FIT21 will help eradicate fraud, ensure oversight of Crypto Assets exchange, and protect U.S. consumers by imposing strict rules on Crypto Assets transactions. FIT21 has bipartisan support because it addresses these issues. I encourage everyone who believes in the power of Blockchain technology to support this legislation. ”

Background

On July 20, 2023, House Agriculture Committee Chairman Glenn "GT" Thompson, Rep. French Hill, Rep. Dusty Johnson, Whip Tom Emmer, and Rep. Warren Davidson sponsored H.R. 4763, the Financial Innovation and Technology Act for the 21st Century (FIT21). Patrick McHenry, chairman of the House Financial Services Committee, was one of the co-sponsors of the legislation.

FIT21 sets out clear and practical federal requirements for the digital asset market. It provides strong consumer protection and regulatory clarity for the digital asset ecosystem to thrive in the U.S., solidifying U.S. leadership in the future global financial system, while reinforcing our role as a hub for innovation.

The legislation gives the CFTC new jurisdiction over digital commodities and clarifies the SEC's jurisdiction over digital assets that are part of investment contracts. In addition, the bill establishes a process that allows digital goods to be traded in the secondary market if they are initially offered as part of an investment contract. Finally, FIT21 imposes comprehensive customer disclosure, asset protection, and operational requirements for all entities that are required to register with the CFTC and/or SEC.

A quick look at the main contents of the FIT21 bill

FIT21 is 253 pages long, and the golden financial reporter used Kimi to summarize the bill.

Financial Innovation and Technology Act for the 21st Century (H.R.) 4763) is a comprehensive legislation designed to regulate and promote the development of digital asset and Blockchain technology in the United States. Here's a detailed summary of what the bill says:

Part 1: Definitions, Rulemaking, and Registration Notices

• Definitions: Define terms such as "digital asset digital asset", "Blockchain blockchain", "Decentralization decentralized governance", etc.
• Rulemaking: The SEC and the Commodity Futures Trading Commission (CFTC) need to work together to develop rules to further clarify terminology and establish rules for hybrid trading of digital asset trading.
• Notice of Registration: Digital commodity exchanges, brokers, and trading system operators are required to submit notices of intent to register with the CFTC and comply with specific regulatory requirements.

Part II: Clarity of Investment Contract Assets

The short title can be called "Securities Clarity Act of 2024", indicating that the Act aims to provide clarity and clarity to certain assets in the securities market. It mainly revises the content of the U.S. federal securities-related Act, with a special focus on the definition and treatment of "investment contract asset".

(a) Amendments to the Securities Act of 1933: Two major amendments have been made to Section 2(a) of the Securities Act of 1933: The first is the explicit exclusion of "investment contract assets" from the definition of "security." This means that if an asset is classified as an investment contract asset, it will not be considered a security in the traditional sense and may be subject to different regulatory requirements. The second amendment is the addition of a definition of "investment contract assets" at the end of Section 2(a) of the Securities Act. This definition contains three main conditions: 1. The asset must be a transferable digital representation of value that can be securely disclosed on the Distributed Ledger through encryption without intermediaries. 2. The asset must be sold or otherwise transferred, or intended to be sold or otherwise transferred, as part of the investment contract. 3. The asset itself is not considered a security according to the first sentence of the Securities Law.

(b) Amendments to the Investment Advisers Act of 1940: Section 202(a)(18) of the Investment Advisers Act of 1940 was amended to make it clear that the term "securities" does not include investment contract assets.

(c) Amendments to the Investment Company Act of 1940: Section 2(a)(36) of the Investment Company Act of 1940 was amended to similarly state that the term "securities" does not include investment contract assets.

(d) Amendments to the Securities Exchange Act of 1934: Section 3(a)(10) of the Securities Exchange Act of 1934 was amended to clarify that the term "securities" does not include investment contract assets.

(e) Amendments to the Securities Investor Protection Act of 1970: Section 16(14) of the Securities Investor Protection Act of 1970 was amended to state that the term "securities" does not include investment contract assets.

The purpose of these amendments is to provide greater flexibility and clarity for digital assets within the existing securities legal framework, while ensuring investor protection. By excluding investment contract assets from the definition of traditional securities, the Act aims to promote innovation while maintaining appropriate protections for investors.

The provisions of the second part are important for digital asset issuance, investors and regulators. It provides legal clarity for issuance and transactions in digital asset, helping to reduce regulatory uncertainty and potentially encouraging more long investment and innovation to take place in digital asset sectors. At the same time, by excluding investment contract assets as securities, it also provides a new way for the regulation of such assets.

Part III: Offering and Sale of Digital Assets

• Exempt Transactions: Specific exemptions for digital asset transactions are specified.
• Requirements: Set requirements for the offering and sale of certain digital assets.
• Enhanced disclosure requirements: Require enhanced disclosure of digital assets.
• Authentication: Certify certain digital assets.

Part IV: SEC Registered digital asset intermediary

• Handling of digital goods and other digital assets: Sets out the SEC's regulatory authority over digital goods and other digital assets.
• Registration and requirements: Involves registration, requirements and rules related to digital asset brokers and dealers for digital asset trading systems.

Part V: digital asset intermediary registered with the CFTC

• CFTC Jurisdiction over Digital Commodity Trading: Clarifies the scope of the CFTC's supervision of digital commodity trading.
• Registration and regulation: Sets out registration and regulatory requirements for digital commodity exchanges, brokers, trading advisors, and commodity pool operators.

Part VI: Innovation and Technological Improvement

• Investigations and reports: Require the SEC and CFTC to conduct research and submit reports on fintech innovation, DeFi, non-fungible digital assets, financial literacy of digital asset holders, and financial market infrastructure improvements.

Other Important Terms & Regulations

• Date of entry into force of the law: Longest provisions will take effect 360 days after the enactment of the bill, or 60 days after the enactment of the rule, unless a rule is required.
• Coordination between the SEC and CFTC: The two agencies will work together to develop rules to promote the fair and orderly development of the digital asset market and protect investors.
• International harmonization: The SEC and CFTC will coordinate with foreign regulators to establish consistent regulatory standards for digital assets around the world.
• Bank Secrecy Law: Digital asset trading systems are considered financial institutions and are subject to bank secrecy laws.

Fees & Funding

• Fee Collection: The CFTC will charge registration fees, annual fees, and termination fees for entities that register digital commodity exchanges, brokers, and trading systems.
• Fee Adjustments: CFTC reserves the right to adjust fees as necessary to promote fair competition and innovation.
• Fee Usage: The fee collected will be used to cover the cost of implementing the CFTC's functions under this Act.

Research & Reports

• DeFi Research: The SEC and CFTC will jointly conduct research to analyze the nature, size, role, use, and degree of integration of DeFi with the TradFi market.
• Non-fungible digital asset research: study the nature, market and integration of non-fungible digital asset with traditional markets.
• Financial Literacy Research: Assessing ways to improve the financial literacy of digital asset holders.
• Financial Market Infrastructure Research: Assess whether additional guidance or rules are needed to facilitate the development of tokenization securities and derivatives.

Conclusion

H.R. 4763 provides a comprehensive framework to regulate and promote the development of digital asset and Blockchain technology in the United States. The bill lays the foundation for rise and innovation in the digital asset market by defining key terms, setting registration requirements, enhancing disclosure and transparency, and facilitating international regulatory harmonization. In addition, the bill emphasizes the importance of research into financial technology and the digital asset ecosystem, as well as increasing public awareness and understanding of these emerging technologies. Through these measures, the bill aims to protect investors, preserve market integrity, and harness the potential of digital assets and Blockchain technology to enhance the U.S. economy.