a16z: A Detailed Explanation of the FIT21 Act and How It Helps the Development of the Crypto Industry?

Author: a16z

Compiled by: Deep Tide TechFlow

At the end of this month, the House will vote on an important bill (HR 4763), and we believe you should pay attention to this matter.

++Financial Innovation and Technology for the 21st Century Act++, also known as the FIT21 Act, if passed, will clarify the regulation of cryptocurrencies in the United States, benefiting every practitioner in the industry. If this bill is approved, it will:

• Provide a safe and effective pathway for blockchain projects to launch in the U.S.;

• Clarify the boundaries between the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC), specifically who regulates which activities in cryptocurrencies, and whether digital assets are securities or commodities;

• Ensure oversight of cryptocurrency exchanges and further protect U.S. consumers by implementing cryptocurrency trading rules.

We will share with you below the reasons why all of this is so important.

What does this bill include?

The FIT21 Act/HR 4763 establishes a regulatory framework for the U.S. digital asset market to:

Address the unique structural issues of digital assets;

Provide clear and robust consumer protection measures;

Clarify which digital assets are regulated by the Commodity Futures Trading Commission (CFTC) and which are regulated by the Securities and Exchange Commission (SEC). This is important because there are significant differences in the definitions of "commodities" and "securities," which have a major impact on how they are regulated.

• If the blockchain or digital ledger operating the digital asset is functional and decentralized, the CFTC will regulate the digital asset as a commodity.
• If the associated blockchain is functional but not decentralized, the SEC will regulate the digital asset as a security.

The bill defines decentralization as: among other requirements, if no one has unilateral control over the blockchain or its use, and no issuer or affiliate holds 20% or more of the control or voting rights of the digital asset.

The bill also stipulates other consumer protection requirements, such as the separation of customer funds; lock-up periods for token insiders (to incentivize innovation rather than mere speculation); annual sales volume limits; and disclosure requirements.

These protections are somewhat similar to those implemented by regulators after the Great Depression, following the over-speculation of the 1920s and the stock market crash of 1929. Once these measures were established, the U.S. entered an unprecedented era of market and economic growth and innovation.

What does this bill not include?

Some industry insiders are concerned that the bill grants the SEC too much jurisdiction, as it sets very high thresholds for decentralization and the ability to reclaim any re-centralized tokens or projects. Others worry that the bill does not clearly delineate the jurisdictional boundaries between the SEC and the CFTC.

However, despite its imperfections, this bill will provide the regulatory certainty needed for the crypto industry to continue operating and innovating in the U.S.

Some may ask why any form of regulation is necessary. Lack of regulation is unrealistic, and clearer rules are better than chaotic rules. Regulation and a clear path to corporate compliance allow innovators to build trust with the public and provide useful products while holding any ill-intentioned actors more accountable.

Who are the driving forces behind this?

The FIT21 Act is a joint effort of the House Financial Services Committee (which oversees the SEC) and the House Agriculture Committee (which oversees the CFTC), and it has received support from the industry. Last July, the Financial Services Committee passed the bill with support from six Democrats and all Republicans on the committee, and it was also passed unanimously by the Agriculture Committee. Since then, the bill has received bipartisan support.

Why now, and what can you do to help?

The vote on this bill will take place in the coming weeks, and it will be a referendum on cryptocurrency in the United States.

Therefore, it is crucial to ensure that the bill passes with strong bipartisan support. After that, it will also need to pass in the Senate and be signed into law by the President. So, we are at a critical moment. To do your part, we urge you to contact your local representatives through the Stand with Crypto website.

Why is this important?

Although the crypto industry has existed for over a decade, there is still no comprehensive regulatory framework for digital assets in the U.S. The current regulatory framework is fragmented, incomplete, and lacks clarity. This regulatory uncertainty not only creates a confusing environment for innovation but also provides a breeding ground for bad actors. As we have seen, companies and individuals with ill intentions can easily launch products that exploit regulatory gaps.

Meanwhile, responsible actors—legitimate entrepreneurs and startups—suffer from dubious "enforcement-based regulation." This practice undermines innovation in the U.S., especially in the face of ongoing innovation in other countries, and is detrimental to the long-term dominance of the dollar, U.S. consumers, and the overall development of the U.S. economy.

When other jurisdictions offer appropriate regulatory frameworks, startup activity often shifts abroad. This is not an abstract concern: startups create jobs, economic value, and can develop into the next large tech companies. For example, Amazon, Apple, Facebook, Google, Microsoft, Netflix, Nvidia, and Salesforce are all companies founded in the U.S., some of which were established in just the past 20 years. Today, they not only dominate market value but also profoundly influence our daily lives. The FIT21 Act has the potential to create an environment that supports innovation in the crypto industry, while avoiding a scenario where a few large tech companies monopolize the market and act as gatekeepers for the majority.

Regardless of your views on cryptocurrency, it is not just a financial opportunity; it represents a significant shift in a technological platform, much like how personal computers, mobile phones, and the internet changed our world. While the internet is one of the most important technological innovations in human history, it is failing the consumers, creators, and developers who rely on it today. Blockchain, cryptocurrencies, and Web3 can address this issue in various ways: from authenticity proofs against deep fakes and identity verification against AI, to more voice and choice in social media platforms, to more inclusive payment systems, and more. But we need a favorable environment for these innovations to continue to develop in the U.S.