About FIT21 Act: Background, content and influence

Author: taxdao-ray

On May 22, 2024, the US House of Representatives passed the “21st Century Financial Innovation and Science and Technology Act” (The Financial Innovation and Technology for the 21St Century Act, Fit21) with a high vote of 279 to 136.It aims to modify existing securities and commodity regulatory regulations, establish a regulatory framework for digital assets to promote the development of the encrypted industry.Once the FIT21 Act is officially promulgated, it will become an important milestone in the US federal digital asset supervision system.This article will interpret the FIT21 bill from the aspects of legislative background, bill content, and potential impact.

1. The legislative background of the FIT21 Act

Since Bitcoin’s creation block has been excavated, encrypted digital assets have existed and developed for 15 years, and are currently in a stage of vitality and mature.But whether it is the United States or other countries, they have not yet established a comprehensive regulatory framework for digital assets, but only scattered and one -sided supervision.With various types of illegal and criminal acts, it seriously hinders the innovation and progress of the encrypted digital industry.Critics believe that under the existing encryption supervision framework in the United States, startups in the encrypted digital industry have suffered “supervision based on law enforcement”, which will cause relevant companies to transfer business activities in other countries, which is not conducive to the United StatesScientific and technological innovation is not conducive to the overall development of the US economy.Therefore, the United States urgently needs to create an environment that supports innovation through legislation, give full excavation of the future potential of the crypto industry, while avoiding the production of a small number of large technology companies in the Web 2.0 era.

In September 2022, the White House released the “First-EVER Comprehesive Framework for Responsible Development of Digital Assets”, and urged the US Commodity Futures Trade Commission (Commodity F) UTURES Trading Commission, CFTC) Establish specific rules for regulating digital assets with the Securities and Exchange Commission (SEC).FIT21’s draft law can be traced directly back to March 2023. At that time, digital assets, financial technology and inclusive group committees led by American Representative French Hill had planned to cooperate with the House Agricultural Committee to formulate a regulatory framework for digital assets.In July of the same year, the US House of Representatives Financial Services Committee and the House Agricultural Committee passed the FIT21 Act, and the House of Representatives completed the vote process of the bill until May 2024.The FIT21 Act will be submitted to the Senate to vote in the short time, and after being passed by the Senate, it will be signed and officially released by the president.

The recent dynamics of the SAB 121 (Staff Accounting Bulletin No. 121) also made the House of Representatives and the encryption industry highly hope for the FIT21 bill.SEC released SAB 121 in 2022, which requires digital asset custodian to regard digital assets as liabilities and hold fair value on its balance sheet.Based on this, if the bank wants to hold digital assets, it must hold cash consistent with the fair value of the asset on the account.Bank exclusion is outside the encryption industry.In mid -to -early May 2024, that is, before the SEC’s attitude towards ETH spot ETF, the two hospitals of the Republic of China took actions to pass the overthrow of SAB 121, but the good times did not last.The bill of rejection of overthrowing the SAB 121 has disappointed the two hospitals and the encryption industry, and put more hope on the FIT121 bill to vote and the president signed by the Senate.

2. Overview of the FIT21 Act

The FIT21 Act consists of multiple chapters. Each chapter involves different aspects of the digital asset supervision and innovation system. This section will classify the contents of each chapter of the FIT21 bill and summarize the main regulatory framework it established.

2.1 Overview of the chapter of the FIT21 Act

The first chapter of the FIT21 Act is called “Definition; Rules Formulation; Definitions; Rulemaking; Notice of Intent to Register”. “This part defines key terms under various laws, including the 1933 Securities Law, “1934 Securities Trading Law” and “Commodity Trading Law”.These definitions include terms such as “digital assets”, “blockchain” and “decentralized system”, which clarifies the scope of the bill.

The second chapter is mainly to clarify digital assets as part of the investment contract.Article 202 of this chapter describes the digital assets as part of the investment contract, which defines it as a replacement number of values, and also specifies how to classify and supervise it and distinguish it from traditional securities.

The third chapter mainly specifies how to supervise the provision and sales behavior of digital assets.Specifically, Article 301 stipulates the exemption of the trading of digital assets, and Article 302 stipulates the specific requirements for providing and sales behavior of certain digital assets.Disclosure requirements of chain system.

Chapter 4 and 5 are registered on the registration matters of digital asset intermediaries under the jurisdiction of SEC and CFTC.The digital asset intermediaries here include digital asset exchanges, digital asset brokers, digital asset dealers, and digital asset custodians.Relevant provisions involve business requirements such as transaction certification and license. The general and special conditions, methods and exemptions of different registered entities, as well as specific content such as registered requirements such as registration and exemption.

Chapter 6 entitled “Innovation and Technology Improvements”, which is both a title and a conclusion, showing the judgment of the drafting of the bill with Congress.Related to this, the SEC will establish an Innovation and Financial Technology Strategy Center (FinHUB), and CFTC will establish LABCFTC.According to FIT21, the main internal functions of these two centers are to shape the methods of SEC and CFTC inspection of financial technology innovation, analyze the impact of regulations on fintech companies, and so on.Although these two research centers are in contact with stakeholders and provide information about relevant rules and regulations for those engaged in emerging technical work, in view of the wording of FIT21, the US Congress does not seem to think they will become active supervision sandboxes.Because neither SEC nor CFTC was granted specific free tailoring in regulatory.

2.2 Overview of the regulatory framework of the FIT21 Act

In general, FIT21 will establish a federal digital asset regulatory framework by clarifying the supervision of digital assets and transactions by SEC and CFTC to update the existing securities and commodity laws, as well as updating the existing securities and commodity laws.Seeding blockchain technology.Some opinion believes that the protection measures for FIT21 for technology and innovation are similar to the protection measures implemented by the United States after the economic depression in the 1920s. After the latter was implemented, the United States ushered in unprecedented economic growth and innovation era.

The FIT21 Act’s regulatory framework for the establishment of digital assets mainly includes the following four aspects.The first is that CFTC must supervise digital assets as products. The premise is that the blockchain or encrypted digital ledger runs run by it is functional and decentralized.In addition, the bill also gives CFTC’s exclusive regulatory right to crypto products and the spot market.The second is that when the function of the relevant blockchain is normal but not decentralized, the SEC must supervise digital assets as securities.The FIT21 Act stipulates some exceptions by the supervision of digital assets, involving annual sales, qualified investors and other matters, and stipulates the requirements for first -level and secondary market transactions.Third, CFTC and SEC must jointly release rules to formulate relevant provisions and avoid repeated regulatory rules faced by the exchange.Fourth, the bill is excluded from the approved stable currency to the supervision of CFTC and SEC, except for specific transactions on anti -fraud agencies and registered entities.

3. Article 101 and 103 interpretation of the FIT21 Act

It is clear that the object is the premise of taking action. Article 101 and 103 of the FIT21 Act made detailed definitions of restricted digital assets (securities), digital goods and licenseable payment stablecoins, and given specific judgments to judgestandard.It depends on this, the SEC and CFTC can clarify the scope of their responsibilities, and monitor the restricted digital assets and digital products, and the permitted payment stable coins are not within the jurisdiction of the two.This constitutes the prerequisite for subsequent regulation and guidance measures, and the encryption industry will also obtain a more orderly regulatory framework and more stable development space.In general, the FIT21 Act divides digital assets into three categories: restricted digital assets, Digital Commodity, and Permitted Payment Stablecoin.The relationship between the three is: digital assets are generally limited digital assets, unless their self -authentication is a digital product or the definition of payment stable currency with licensed payment.

3.1 Digital assets

Article 101, (26th, (Digital Asset) first defines the Digital Asset, and listed the exclusion.This article stipulates that digital assets “refer to any replaced digital value representation, which can be completely owned and transferred by individuals without relying on intermediaries, and recorded on a public distributed classification account with encrypted security.”However, digital assets do not include any bills, stocks, inventory stocks, securities futures, securities exchange, bonds, debt certificates, debt certificates …, Futures, swaps, etc. assets.

What needs to be noted is that Article 101 also emphasizes two points: First, “No content in this paragraph must be explained as a representative of any type of securities that presume that digital assets are not excluded from the definition of digital assets”, thisExplain that Fit21 adheres to strict definition methods for digital assets, and distinguish other types of securities from digital assets.The second is that “digital assets that are sold or sold or intended to be sold or sold according to the investment contract will not become securities because they are sold according to the investment contract or are transferred in other ways.” To understand this, we must first understand the HOWEY Test (howTest).The concept of securities in US law was first developed from the word “investment contract” in Hawawei’s testing, and one of the four test conditions for Haowei’s tests was that the income came from Efforts of Others.Under this requirement, the efforts of the project party and related parties are the key to investors’ gains, and investors themselves only need to pay the designated costs and costs, and they do not actually participate in the operation and management of the project.However, the issuance and management of digital assets often rely on smart contracts and other automatic programs. At this time, there is no effort by project parties and related parties in the traditional sense.The relevant provisions of the FIT21 Act to exclude digital assets from securities is mainly to promote technological innovation and take into account the protection of investors.

3.2 Limited digital assets

The 34th item defines the “restricted digital assets” and proposes three criteria for determining “restricted digital assets”: (1) the degree of decentralization and functions of the underlying blockchain system of digital assets; (2) usersFinally, the method of obtaining digital assets; and (3) the identity of the party holding digital assets.Clarifying the specific meaning of these standards will help distinguish restricted digital assets and other digital assets.What needs to be explained in advance is that the “restricted digital assets” here actually means that the digital assets have the nature of “securities”, but the legislators have not used the term “Security”.Including restricted digital assets.

According to the 25th, the judgment of the degree of decentralization and functions include the following aspects: (1) In terms of control and influence, there is no individual or entity directly or indirectly in the past 12 months.Power to control or substantially change the function or operation of the blockchain system.(2) In terms of the distribution of digital asset ownership and governance rights, in the past 12 months, there are no digital asset issuers and affiliated people. In total, they actually have digital assets with a total issue of 20%, or no digital asset issuerMaster a total of 20%or more circulation voting rights with the relevant personnel or related decentralized governance systems.(3) In terms of code modification, in the past 3 months, no digital asset issuer and affiliates have modified the source code of the blockchain system in substantial or unilaterally, thereby substantially changing the blockchain systemFunctions or operations, unless these modifications are to solve vulnerabilities and misalignment, regular maintenance, preventing network security risks or improving blockchain technology.(4) In terms of marketing, in the past three months, any digital asset publisher and affiliates have not sold digital assets to the public as investment.(5) The digital asset units issued through the programmatic function of the blockchain system are all issued by end users.It should be noted that, according to the 30th provisions, the so -called end user issuance refers to the extensive, fair, and non -free discretion that does not involve the exchange of asset exchange, but in the way that any participants in the blockchain can be performed.Typical examples such as mining and pledge of blockchain users.

In the above standards, the more important standards are “12 months” and “20%”. 12 months are the vertical judgment criteria for decentralization, and 20%is the horizontal judgment standard for decentralization.Whether it is 12 months, 15 months, 20%or 30%, the specific value itself is not the most important. The most important thing is that it gives the exact and quantified standard, so that the judgment of the degree of decentralization is moreTo objective.

For users to obtain digital assets, this provision requires restricted digital assets to be issued to users by non -end user issuance, or it is obtained by users in non -digital commodity exchanges.

For the last standard, the restricted digital assets must be all digital assets held by the issuer and affiliated people during the period of the blockchain system that are not functional or not to become a decentralized system.In addition, the permitted payment stablecoin is exempted from restricted digital assets.

3.3 A licensed payment stable currency

Article 101 The 32 of the permitted payment stable currency is defined.This article stipulates that a permitted payment stablecoin refers to the use of or designed as a means of payment or settlement. The issuer has the obligation to transform, redemption or repurchase to obtain a fixed amount of currency value, or it may be maintained or reasonable to be reasonable or reasonable.It is expected that it will maintain a stable value relative to the value of the currency value. At the same time, its issuer is supervised by the rights of the federal or state regulatory agencies, and the stable currency is not a national currency or securities.The aforementioned currency value refers to the equivalent notes of the country’s currency, deposit or the currency of the country.It can be seen from this certain meaning that on the one hand, the FIT21 Act emphasizes the significance of the license system for payment stable currency, and on the other hand, it shows that only fiat currency or bill mortgage stabilization coins have the opportunity to obtain permission, and the algorithm stable coin is excluded in the license rangeIn addition.

3.4 Digital products

Article 103, item 55 of the “digital commodities”.The digital products here also involve three cases.First, before the relevant blockchain system became a functional system and was certified as a decentralized system, any digital asset unit held by the individual except digital asset issuers or affiliated people, and the digital asset unit passed the final final.It is issued or obtained in the digital commodity exchange; the second is that after the relevant blockchain system becomes a functional system and is certified as a decentralized system, any number held by digital asset issuers or people other than related peopleAsset units; Third, any digital asset unit held by any related personnel in the relevant blockchain system and being certified as a decentralized system.Digital products do not include permitted payment stable currency.There is also a special rule here, that is, before the FIT21 Act was promulgated, if the federal court had ruled that digital assets were not securities, then the digital assets should be identified as digital commodities under the circumstances of the ruling.After the FIT21 Act is eliminated, the attitude of securities and commodities is essentially a two -point attitude to digital assets.

4. The potential impact after passing the FIT21 Act

4.1 FIT21 Affairs of the FIT21 on encryption tax

According to IRS Notice 2014-21, all encrypted assets are regarded as property rather than currencies, so it is suitable for general tax principles for property transactions.However, the definition of IRS’s definition of encrypted assets is widely defined, and it believes that “the number represents the value of the distributed ledger of cryptographic security or the value recorded by any similar technology” is an encrypted asset.The FIT21 Act provides a detailed basis and standard for IRS to judge the scope of encrypted assets and the determination of specific encrypted assets belongs to digital commodities or securities.Class taxation.

At the same time, it is important to emphasize that the FIT21 Act has not used the term “securities” from the beginning to the end. It is not applicable to restricted digital assets that are similar to the limited restrictions of the applicable objects.For example, the U.S. tax law allows investment losses to deduct taxes, but strictly prohibit the lack of caution, that is, investors must not sell an asset to first, and then buy the same and similar securities in the near future.The securities here include stocks, bonds, common funds, ETFs, options, futures, and equity certificates, and the term “restricted digital assets” will continue to exclude encrypted assets outside the loading rules.

4.2 FIT21 Act

In terms of regulatory subjects and objects, the FIT21 Act tries to distinguish restricted digital assets and digital products, and exempts the permitted payment stablecoin to designate clear regulatory objects and regulatory scope for the two major regulatory agencies SEC and CFTC.The order of digital asset supervision prevents the negative effects caused by unknown and conflict of supervision power.

In terms of regulatory content, the FIT21 Act not only requires SEC and CFTC to be responsible for the registration and management of digital assets, but also enhance the requirements of digital asset information disclosure requirements. It also requires the SEC and CFTC to implement the anti -money laundering (AML) system and anti -fraud mechanism.Further enrich the supervision of encrypted assets.

In terms of regulatory style, overall, the FIT21 Act adopts a flexible and inclusive regulatory policy. At the same time, it attaches importance to the protection of small and medium -sized investors and consumers, which provides an orderly and sufficient space for the innovation and development of the encryption industry in the United States. This will be.Attract more encrypted talents and companies to the United States, further stimulate the vitality and vitality of the US encrypted industry, and finally further enhance the global financial competitiveness in the world.

5. Conclusion

Although the FIT21 Act can finally pass through certain uncertainty, the US House of Representatives has become more friendly to explain that legislators’ attitudes towards encrypted assets by passing the FTI21 Act itself.Friendship does not mean letting go. On the contrary, the United States hopes to create a stable and effective regulatory environment for the benign growth of the encryption asset market through the FIT21 Act.In the future, SEC and CFTC will unite to further pay more attention to the integration of DEFI and financial markets, NFT and traditional markets, and further enhance the financial literacy of encrypted asset investors, strengthen the infrastructure construction of blockchain financial markets, and protect the rights of investors.At the same time, to maximize the role of crypto assets and blockchain technology on economic development.

Reference

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