Is the SEC going to "take a back seat"? The U.S. House of Representatives passed the FIT21 bill, making the CFTC the primary regulatory agency

Author: BitPush

On the afternoon of May 22 local time, the U.S. House of Representatives passed the Republican-led Financial Innovation and Technology for the 21st Century Act (abbreviated as FIT-21) with a vote of 279 in favor and 136 against.

This is the first time comprehensive cryptocurrency legislation has been voted on in the House, and it received bipartisan support from Democrats, with 71 Democrats voting in favor of the bill, marking the most significant legislative achievement for the cryptocurrency industry in Congress.

The next baton will be passed to the Senate. Although the outlook is uncertain, it has already been proven that U.S. lawmakers' views on cryptocurrencies are changing, and the cryptocurrency industry has taken a "big step."

SEC sidelined, CFTC as the primary regulatory agency

The FIT-21 bill will clarify the regulatory boundaries of the cryptocurrency industry, granting the Commodity Futures Trading Commission (CFTC) primary jurisdiction over the industry, while the SEC's jurisdiction will be "sacrificed."

FIT-21 will create a tailored disclosure and registration system for digital asset companies, as cryptocurrency firms have long believed that the SEC's insistence on traditional disclosure requirements for these businesses is unworkable.

Specifically, the bill will empower the CFTC with more authority and funding to oversee the cryptocurrency spot market and "digital commodities," particularly Bitcoin. The bill also creates a process that allows digital commodities "initially offered as part of an investment contract" to be traded on the secondary market. The bill also includes stablecoin and anti-money laundering provisions.

Ron Hammond, Director of Government Relations at the Blockchain Association, stated: "In the past 48 hours, we have seen grassroots and political forces in the cryptocurrency space lead to a significant shift in Washington's view of the industry. This perception of the industry seems to have changed not only before the FIT-21 vote but could potentially eliminate the regulatory barriers that the SEC Chair has tried to establish."

Hammond added that FIT-21 is "a huge turning point."

Stalled in the Senate? Not necessarily

Most analysts and industry insiders point out that while FIT-21 is unlikely to be brought up in the Senate this year, the bill could lay the groundwork for the next Congress in January.

Davis Polk lawyers wrote in a letter to clients: "Despite facing a tough approval process in the Senate, and potentially facing a presidential veto if it moves forward, this effort marks the most important milestone in establishing the comprehensive regulatory framework urgently needed for the U.S. digital asset market to date. Simply bringing the bill to a vote in the House reflects the seriousness with which many members of Congress regard this issue."

However, some believe that Wednesday's vote could lead to a significant bipartisan statement.

An industry insider familiar with congressional negotiations told MarketWatch: "I think we shouldn't be so pessimistic about the Senate and assume they won't take action on this before the end of the year."

One reason for optimism is that last week, the House and Senate voted to overturn the SEC's accounting guidance, which opponents claimed made it too costly for financial institutions to custody cryptocurrencies like Bitcoin and Ethereum for clients. More than twenty House Democrats, including New York Majority Leader Chuck Schumer, and a dozen Senate Democrats voted to overturn this rule despite the Biden administration's wishes.

President Joe Biden previously promised to veto the bill but has not yet done so.

A cryptocurrency lobbyist connected to the Democrats told MarketWatch that the bill demonstrates "the Biden administration has realized it doesn't understand this issue," as well as the political risks associated with being seen as anti-crypto ahead of a tough re-election battle.

Meanwhile, the bill contains many provisions supported by Democrats, including expanding the CFTC's authority to regulate the cryptocurrency spot market and exchanges, as well as requiring cryptocurrency intermediaries to comply with anti-money laundering requirements and the Bank Secrecy Act.

Insiders noted that another argument influencing some Democrats is that the current Supreme Court has been highly skeptical of financial regulators claiming new powers, and if Congress does not act now, the Supreme Court may ultimately decide the future of cryptocurrency regulation.

Todd Phillips, a financial regulation expert at the left-leaning Roosevelt Institute, made a point in a recent briefing, writing: "The legal arguments of the cryptocurrency industry are not without merit, and their arguments based on history and congressional intent may persuade this Court (the most conservative Court in nearly a century) to side with the industry."

According to a letter sent to Democratic colleagues on Monday, powerful Democrats in Congress, including House Financial Services Committee Democratic Leader Maxine Waters from California, "strongly oppose" this legislation. However, Politico reported that Democratic leadership has decided not to focus on opposing the bill.

Cantrell Dumas, Derivatives Policy Director at the financial reform organization Better Markets, stated in a statement on Tuesday: "Congress should consider whether this legislation leaves loopholes to evade SEC oversight, similar to the unregulated derivatives before the 2008 financial crisis."

He expressed the concerns of many congressional Democrats and added: "Lawmakers must also ask whether the resources provided to the CFTC in the bill are sufficient to meet the needs of an underfunded agency." "Without adequate funding, increasing the CFTC's authority will inevitably severely impair the agency's ability to fulfill the important responsibilities that all Americans rely on and benefit from."

Gaining support for the bill from Democratic leaders such as New York House Minority Leader Hakeem Jeffries is also urgent, as Senate Banking Committee member and Ohio Democrat Sherrod Brown has expressed opposition to cryptocurrency market structure legislation.

Ian Katz, a financial services analyst at Capital Alpha Partners, wrote in a client report this week: "The Senate typically does not take up House bills and then vote on them, so while the Senate may ultimately be interested in considering some form of cryptocurrency legislation, it will almost certainly not be the FIT-21 bill."

House Financial Services Committee Chairman Patrick McHenry, who will retire when his term ends in January 2025, told reporters at a briefing on Tuesday that he will "do everything possible to get as much as he can from Congress" and expressed confidence in gaining bipartisan support, stating: "My time as chairman and my tenure in Congress are coming to an end, but the policy does not end."