The impact of the FIT21 Act on the crypto ecosystem

Just before the U.S. Securities and Exchange Commission approved the regulatory documents for the Ethereum spot ETF, the U.S. House of Representatives passed the FIT21 Act, which guides U.S. regulators in overseeing cryptocurrency assets.

There hasn't been much discussion online about this bill, but it actually has extremely far-reaching implications for how the U.S. government will regulate cryptocurrency assets in the future. It is also a bill that cryptocurrency project teams must study carefully before issuing cryptocurrency assets in the U.S.

I have extracted some interesting provisions from it.

The bill clearly defines that there are two regulatory bodies for cryptocurrency assets: one is the U.S. Commodity Futures Trading Commission (CFTC), and the other is the U.S. Securities and Exchange Commission (SEC).

How do these two agencies regulate cryptocurrency assets?

The bill states: If a cryptocurrency asset is defined as a commodity, it falls under the CFTC's jurisdiction; if it is defined as a security, it falls under the SEC's jurisdiction.

So how do we determine whether a cryptocurrency asset is a commodity or a security?

The bill proposes several key elements to distinguish whether a digital asset is a security or a commodity: including "investment contracts (The Howey Test)," "use and consumption," "degree of decentralization," "functional and technical characteristics," and "market activities."

Among these elements, except for "degree of decentralization," the other elements are relatively easy to understand in terms of definitions, falling within the traditional categories of commodities or securities. Only "degree of decentralization" is a new concept introduced by blockchain technology and cryptocurrency assets.

What counts as "decentralized"?

The bill stipulates (in essence): If no one has direct control and holds tokens/voting rights of no more than 20% over the past 12 months, then it is considered decentralized.

This definition of "decentralization" actually provides a reference standard for us to speculate on the targets that may be aimed at by Wall Street institutions in the future.

The introduction of cryptocurrency assets to traditional finance in a compliant manner through Wall Street institutions and attracting a broad public is an unstoppable trend.

Bitcoin and Ethereum have already been successfully demonstrated by Wall Street institutions and incorporated into the U.S. government's regulatory framework. In the future, more and more cryptocurrency assets will undergo similar operations by Wall Street.

In fact, clear and appropriate regulation can not only promote the healthy and long-term development of the cryptocurrency ecosystem but also drive the value and price of cryptocurrency assets to rise steadily.

Therefore, I have always believed that we should not panic or resist this but should view reasonable and appropriate regulation positively. Frankly speaking, I have a very positive view of Wall Street's two recent spot ETF operations for Bitcoin and Ethereum (even though I do not like these institutions at all).

This is the perspective on the bill from Wall Street and regulatory angles.

From the perspective of cryptocurrency project teams, how can we view this bill?

First of all, in the entire cryptocurrency ecosystem, assets like Bitcoin that do not rely on team operations are indeed in the minority; most projects, like Ethereum, must develop under the leadership of a team.

Therefore, any cryptocurrency team must consider what kind of regulation they may face when issuing their own assets in the future.

Among the SEC and CFTC, the CFTC's regulation is much more lenient and inclusive. Thus, for general project teams, unless there is a specific purpose (such as issuing securities), they would generally prefer their issued tokens to be regulated by the CFTC.

If a project team wants their issued tokens to be regarded as "commodities" and regulated by the CFTC, then based on the excerpts above, a unique standard for the cryptocurrency ecosystem is worth noting: "degree of decentralization."

For users in the cryptocurrency ecosystem, when we talk about "decentralization," we usually emphasize the project's immunity from monopolistic interference and manipulation; however, in this bill, it becomes an important criterion for determining whether a cryptocurrency asset is a commodity or a security.

Following this line of thought, if project teams want their issued tokens to pass regulatory scrutiny as much as possible, they must pay close attention to "decentralization," at least not monopolizing tokens and then manipulating the market at will as in the past.

As investors, how should we view this bill?

We can use it as a reference for evaluating investment targets.

For example, if a token is regarded as a commodity, to some extent, we can also consider it sufficiently "decentralized"; conversely, if a token is sufficiently "decentralized" for users in the cryptocurrency ecosystem, we can also speculate that it is likely to be recognized as a commodity, thus relatively easily passing the CFTC's review.

Based on this standard, we can carefully examine the currently popular blockchain tokens (such as BNB, Solana, Aptos, SUI, MATIC, …), classic ERC-20 tokens (UNI, CRV, MAKER, AAVE, …), and emerging inscription tokens (ORDI, SATS, …), and then combine other determining conditions (investment contracts, use and consumption, functional and technical characteristics, market activities) to at least roughly guess which of these tokens might more easily pass the review based on the criteria.