Congress tries to curb chaos of cryptocurrency

Lawmakers on Capitol Hill are keenly aware that virtual assets have value. They vividly remember FTX, the cryptocurrency exchange platform that crashed in November 2022 due to mismanagement. Billions of investment dollars vaporized along with it.

“Here in Congress we’re supposed to be in the problem-solving business and, my, oh my, do we have problems in the digital asset space,” Rep. Dusty Johnson, R-S.D., chairman of the subcommittee on commodity markets, digital assets, and rural development, said on Wednesday. “In recent years we’ve seen the FTX debacle under a regime that does not work today. We are the only G7 country that hasn’t figured this out yet.”

On Wednesday, the House of Representatives voted 279-136 in favor of a bipartisan bill to clear up the murky answer to the question at the heart of digital asset regulation: Who has the authority to regulate what? Seventy-one Democrats voted with 208 Republicans to pass the bill.

The Financial Innovation and Technology for the 21st Century Act (FIT21) aims to define when a digital asset is considered a security and when it is a commodity—as well as which regulatory body has top authority. If passed by the Senate and signed into law by President Joe Biden, FIT21 would become the first major congressional bill to address digital asset regulation.

A security is an investment contract in which the investor hopes to make a profit through the work of a third party, like owning stock in a company. Commodities, on the other hand, are basic goods that can be traded or exchanged. Digital assets like bitcoin can fit under both definitions because buyers sometimes invest in the value of bitcoin, but also exchange bitcoin itself.

One of the bill’s Democratic architects, Rep. Wiley Nickel, D-N.C., told me that a clarification between the two has been a long time coming.

“We need to address the regulatory gaps and protect consumers,” Nickel said. “Right now, we have regulatory uncertainty in a major way. Nobody knows what the rules are. We’re operating off of 100-year-old securities law. Congress has never acted on this.”

The bill sets a clear-cut test for digital assets: for decentralized blockchain assets of which no one user controls more than 20 percent, the bill considers them commodities and assigns their regulation to the Commodity Futures Trading Commission (CFTC). Digital assets for which one person or group controls more than 20 percent are considered securities and entrusts its oversight overseen by the Securities and Exchange Commission (SEC).

The bill would also establish requirements for buying and exchanging digital assets directly from the companies or between digital asset holders.

“It provides clarity for investors and for innovators,” Rep. Patrick McHenry, R-N.C., another one of the bill’s main architects, said on the House floor moments before the vote.

But not all lawmakers believe the bill does enough to manage a rapidly growing set of assets that often escape conventional terminology and treatment.

Rep. Maxine Waters, D-Calif., argued the bill could have done more to tighten up regulatory loose ends. She cautioned that the CFTC and the SEC do not have equal enforcement powers. The CFTC has a considerably smaller workforce—just 677 employees, according to the U.S. Equal Employment Opportunity Commission—compared to the 4,500 staffers at the SEC.

“This bill would deregulate a substantial portion of the crypto industry, taking them out of the purview of the SEC and allowing them to operate under a lighter-touch regulatory regime under the CFTC,” Waters said.

Because of their decentralized nature, the largest and most prolific digital assets, such as bitcoin and ethereum, would fall under the purview of the CFTC as commodities.

Waters also warned against exceptions in the bill and the possibility of a “regulatory no man’s land with no primary regulator.” That gray area, Waters argued, stems from Title II of the bill, a portion that lays out exceptions to the regulatory framework.

While the bill clarified regulation of the issuers of the assets themselves, any third-party transactions of a commodity largely won’t fall neatly into the regulation of either the CFTC or the SEC. Waters believes that’s still a sizable portion of the digital market that will go untouched.

“But the bill doesn’t provide an alternative legal framework for these assets,” Waters said. “This represents an extreme MAGA libertarian approach.”

The bill now heads to the Senate, where it faces an uncertain fate.