The digital economy is changing quickly, and the United States is at an important crossroads. Digital assets and blockchain technology are new, hot topics that seem to grow in prevalence by the day. To this end, we very badly need a robust, easily understood regulatory construct. The Financial Innovation and Technology for the 21st Century Act, or FIT21, represents a significant step towards addressing this need. This blog post unpacks the myriad ways FIT21 could redefine America’s place in the world’s digital economy. It focuses primarily on the merits of the proposed legislation while acknowledging its possible downsides.

The Promise of FIT21: A Catalyst for Innovation

FIT21 aims to provide more straightforward rulemaking. It combines consumer protection with a regulation framework tailored to the distinct nature of the blockchain technology. Examples of how FIT21 can help to establish clearer definitions for digital commodities and restricted digital assets. Going this route will further ensure that regulatory overreach and uncertainty is kept to a minimum. This clarity is incredibly important for companies wishing to enter or build in the digital asset space. It enables them to better understand their regulatory requirements and more meaningfully innovate.

The bill would split jurisdiction over digital assets between the SEC and the CFTC depending on how decentralized they are. This reactivity fails to recognize the distinctive nature of decentralized technologies, and the harms posed by overregulation would stifle innovation and harm the growth potential of the digital economy. Moreover, FIT21 excludes many decentralized finance (DeFi) activities, which would further catalyze innovation and growth in the digital economy.

FIT21 creates a new type of digital asset, called a permitted payment stablecoin. These coins will now not be considered securities, but they’ll be subject to regulation by the CFTC and SEC. This categorization provides regulatory certainty, allowing companies to operate and innovate without fear of uncertainty and potential regulatory actions. The resulting bill provides specific criteria for determining when a digital asset should be classified as a “digital commodity” or a “restricted digital asset.” This clarity will allow companies to better understand their regulatory requirements and push the envelope on innovation.

Potential Pitfalls: Navigating the Challenges

As great as FIT21 is, it’s important to recognize the trade-offs it might introduce. The bill creates two categories of digital assets: “Restricted Digital Assets” and “Digital Commodities.” Aside from burdensome regulatory complexity, this classification risks overwhelming regulatory confusion for all parties involved, particularly for smaller operators entering the industry. FIT21 requires entities engaged in the provision of restricted digital assets and digital commodities to register with each agency. This simple registration serves to ensure all parties are meeting appropriate regulatory guardrails and limit the risk of regulatory overreach.

The Authenticating Leading-edge Digital Tokens bill would require all companies in the fast-growing digital asset space to register and disclose relevant information. That would increase costs, inhibit innovation, and reduce market access. The unclear division of regulatory responsibility between the SEC and CFTC would lead to inter-agency turf battles. This state of affairs can lead to duplicative enforcement actions. FIT21 takes important steps to end regulatory burdens and overreach. For one, it would require the CFTC and SEC to jointly develop a plan to remove duplicative regulations for entities that fall under both agencies’ jurisdiction.

The bill’s decentralization and disclosure requirements would have a chilling effect on innovation in the digital asset space. This is particularly the case for companies that are younger nascent-early stage development. The US is at a clear disadvantage due to its lack of a regulatory framework for digital assets. By contrast, the European Union had already put these regulatory measures in place, providing them a leg-up in competitive advantage.

Weighing the Scales: Benefits and Drawbacks of FIT21

To fully understand the potential impact of FIT21, it's important to consider both the pros and cons:

  • Pros:
    • Regulatory certainty for the crypto industry.
    • Clear guidelines for determining digital asset classification.
    • Pathway for blockchain projects to launch in the US.
    • Clarity on SEC and CFTC jurisdiction.
    • Protection of American consumers.
  • Cons:
    • Regulatory complexity due to asset classification.
    • Increased compliance costs for companies.
    • Potential for regulatory turf battles.
    • Impediments to innovation due to decentralization requirements.
    • Disadvantage to the US compared to other markets.

Conclusion: A Step in the Right Direction with Room for Improvement

FIT21 is a big deal, as it would take us a meaningful step forward in creating a clear and comprehensive regulatory framework for our country’s digital assets. Driven by a clear framework for regulation, careful consumer protection, and agile innovation, the bill’s focus could be the key to US digital supremacy. It’s important to address the possible downsides. These are burdens like regulatory complexity, rising compliance costs, and obstacles to innovation. By carefully considering these factors, policymakers can refine FIT21 and create a regulatory environment that fosters growth, protects consumers, and positions the US as a leader in the global digital economy.