Digital Assets Legislation Passes House of Representatives

The Financial Innovation and Technology for the 21^st Century Act passed the House of Representatives Wednesday by a 279-136 vote. The bill was first proposed in July 2023 and passed out of the committees of jurisdiction on May 6. The Senate has not yet taken up the bill.

Representative Patrick McHenry, R-North Carolina, and the chair of the House Committee on Financial Services, today spoke in defense of the FIT Act at the Investment Company Institute 2024 Leadership Summit, a bill he is a sponsor of.

The act would create a regulatory structure for the digital assets industry and has been criticized by Gary Gensler, the chair of the Securities and Exchange Commission. McHenry characterized Gensler’s criticism sarcastically as “shocking,” at the conference as Gensler is known to be a harsh critic of the crypto industry generally.

If passed, the bill, also known by its bill number, H.R. 4763, would assign regulatory authority to the Commodity Futures Trading Commission of digital assets that are decentralized, as well as over the cash or spot market for digital commodities. Decentralized is defined in the bill as a crypto asset in which “no person has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person has control of 20% or more of the digital asset or the voting power of the digital asset.”

The SEC would regulate digital securities that are not decentralized, with additional exceptions for those that limit annual sales or non-accredited investor access. All rulemaking for digital assets would have to be joint rulemakings of the SEC and CFTC if the bill were passed.

Gensler today identified some potential issues in the bill in his statement. He noted that the bill allows crypto issuers to self-certify that they are decentralized and only gives the SEC 60 days to review and challenge such a certification. Gensler said that the SEC does not have the staffing to review the large volume of digital assets. He also suggested that “pump and dump schemes and penny stock pushers” could falsely claim digital asset status to avoid regulation and the SEC would only have 60 days to review it.

Representative Sean Casten, D-Illinois, proposed an amendment to the FIT bill that would have extended this deadline to 90 days, but it was not accepted.

Gensler added that existing rules are clear enough, it is just that the crypto industry does not want to follow them: “The crypto industry’s record of failures, frauds, and bankruptcies is not because we don’t have rules or because the rules are unclear. It’s because many players in the crypto industry don’t play by the rules. We should make the policy choice to protect the investing public over facilitating business models of noncompliant firms.”

McHenry responded during an interview with ICI CEO Eric Pan that “right now we have no definition of digital asset” under the law and that the bill will provide regulatory clarity for the industry. McHenry added that “it is the Gensler regime that has made things less certain,” and he will continue to focus on “speaking to legislators that have actual votes” on the bill.

The White House said in a statement that “the Administration opposes passage of H.R. 4763, which would affect the regulatory structure for digital assets in the United States,” suggesting that a veto of the bill would be likely if it were to reach President Joe Biden.

During debate on the bill, Representative Stephen Lynch, D-Massachusetts, the ranking Democrat on the House Financial Services Committee Subcommittee on Digital Assets, described the act as among the “top three worst bills I have seen progress to the floor of the House.” Other opponents of the bill explained that it does not address crypto’s role in financing illicit activities and leaves much crypto enforcement to the CFTC, which traditionally has little experience working with intangible assets or in retail markets.