The regulatory and political sentiment around digital assets in the US is shifting in real-time. Recent developments have signaled a potential inflection point that could pave the way for innovation and growth to flourish in the US.
An impediment to the growth of our industry has been the stance of the current administration and the SEC, which has presented headwinds that have discouraged innovation and forced many entrepreneurs to move their blockchain-based businesses overseas. We are excited to see the first signs of change.
Trump sets hits stall
In early May, momentum for pro-crypto policies began to build. Former President Trump openly shifted to a pro-crypto stance, hosting a dinner at Mar-a-Lago for buyers of his NFT trading cards on May 8th and declaring he wanted digital assets businesses to stay in the US. On May 21st, he also made history by accepting crypto donations for his campaign, a first for a major party presidential candidate.
“I am very positive and open-minded to cryptocurrency companies, and all things related to this new and burgeoning industry. Our country must be the leader in the field.”
– Donald Trump, Former President of the United States, Truth Social, May 25, 2024
One may speculate that this endorsement of crypto was in response to a few factors. First, the presidential election is a close race and appealing to the crypto community could lead to a meaningful boost for Trump.
Security.org conducted a study showing that 40% of American adults now own crypto in 2024. Moreover, RFK was the first explicitly pro-crypto candidate – and recent polls say he is gaining ground in crucial swing states.
Attracting the marginal voter
Ultimately, politicians reflect the demands of the marginal voter, and the major political parties are realizing being pro-crypto is a winning strategy.
There is a good deal of speculation that the Democrats and Biden team, seeing Trump elevating crypto into some of his campaign speeches and taking donations denominated in crypto, decided to take a more pro-industry turn as well. This resulted in a quick succession of further wins for the industry.
FIT21 Bill Passes with Bipartisan Support
The next pivotal moment was the passage of the Financial Innovation and Technology for the 21st Century Act (“FIT21”) in the House of Representatives soon thereafter on May 22nd . The bill seeks to establish a comprehensive regulatory framework for digital assets. Garnering bipartisan support with 279 votes in favor (67%) this signals that crypto is becoming an increasingly important issue in the political landscape.
Safe Pathway
FIT21 aims to provide a clear and safe pathway for blockchain projects to raise capital, launch tokens, and operate secondary markets within the United States.
It also delineates when digital assets are classified as securities or commodities based on their level of decentralization – a long-discussed topic as it determines whether the SEC or the CFTC will oversee regulation of certain assets.
For example, digital assets can start as investment contracts and become digital commodities over time. FIT21 establishes the criteria for “decentralization”, one of which is that no issuer or affiliated person should control 20% or more of the digital asset’s token supply or its voting power. This measure is intended to define when a project has become sufficiently decentralized for its token to be considered a digital commodity.
Consumer protection
The bill also introduces measures to protect American consumers investing in digital assets, establishing rules on trading such as the segregation of customer funds, lock-up periods for token insiders, and limitations on annual sale volumes.
“FIT21 is a first step to establish a regulatory framework for digital assets – and it must be improved by working with the Senate and the Administration. While building a foundation for responsible innovation, we must take further action to strengthen guardrails for consumers, investors and taxpayers.
“Digital currency is already integrated into our economy and will only grow in significance in the years to come. Millions of Americans own cryptocurrency. American companies are the cutting edge of global financial technology. Many jobs in my Bay Area community are dependent on this industry.
“The digital asset industry needs clearer rules of the road and the federal government needs stronger enforcement authority in order to ensure the responsible development of this emerging technology.”
– Nancy Pelosi on FIT21 Legislation, May 22, 2024
Significant step
Despite initial opposition from President Biden, SEC Chair Gary Gensler, and some House Democratic leaders, the bill passed without a veto threat from the President. The bill will undoubtedly continue to evolve, and it still needs to pass through the Senate, but nonetheless this is a meaningful starting point. We’ll continue to monitor this as it develops.
Separately, earlier on May 17th, the Senate conducted a bipartisan vote to overturn the SEC’s SAB-121 rulemaking, further underscoring the changing sentiment. The primary contention with SAB-121 was its stringent and burdensome requirements for financial institutions to record crypto assets on their balance sheets, which was a deterrent for banks to offer custody services for digital assets.
We also believe the passage of the FIT21 bill in the House represents a significant step toward creating a more defined regulatory environment for cryptocurrencies, and although the Senate’s move against SAB-121 was vetoed, it showcases a broader push to balance regulation with innovation in the crypto space.
