U.S. House Passes Digital Assets Legislation

The U.S. House of Representatives on May 22 passed H.R. 4763, the “Financial Innovation and Technology for the 21st Century Act” (FIT21).  This represents a significant moment for U.S. digital assets, as the bill sets forth explicit and operational federal guidelines for digital asset markets. 

The bill grants the Commodity Futures Trading Commission (CFTC) expanded authority over digital assets, while delineating the Securities and Exchange Commission’s (SEC’s) jurisdiction over digital assets that are part of an investment contract. The legislation also introduces a mechanism allowing for the secondary market trading of digital assets that were originally offered under an investment contract.  Additionally, FIT21 mandates thorough customer disclosure requirements, asset protection, and operational standards for all entities that must register with either the CFTC or SEC.

According to a press release from the House Financial Services Committee, “FIT21 provides the robust, time-tested consumer protections and regulatory certainty necessary to allow digital asset innovation to flourish in the United States.” The legislation aims to safeguard consumers by enhancing transparency and accountability for market participants. Developers of digital assets would be obligated to provide information on a project’s operations, ownership, and structure.  Customer-facing institutions in the digital asset industry, such as exchanges, brokers, and dealers would be required to provide disclosures to customers, segregate customer funds from their own, and reduce conflicts of interest. Market participants would also have a clear process for understanding which transactions are subject to the SEC’s jurisdiction and which to the CFTC’s jurisdiction.  

In the wake of the collapse of crypto exchange FTX, enhanced regulation as provided for by FIT21 should improve consumer confidence in U.S. digital assets. While it may be challenging for some digital asset developers and small to midsized institutions to comply with the requirements of FIT21, overall it is seen as an important step on the path towards mainstream adoption of digital assets and maturation of the industry. 

Based on industry consensus, FIT21 appears unlikely to pass the Senate. Nonetheless, BDO will continue to monitor legislative progress on FIT21 and other proposed bills addressing digital asset regulation.