The FIT21 Bill passed in the US House of Representatives, which will impose more regulations on crypto exchanges. Here’s why that is a good thing.
The once-divisive topic of cryptocurrencies has found surprising bipartisan support in the US Congress with the successful passage of the Financial Innovation and Technology for the 21st Century Act, or FIT21 Bill. This key bill on cryptocurrency regulations cruised through the House of Representatives with a resounding 279-136 vote, marks a significant shift in the regulatory landscape for digital assets.
The United States has been unusually slow in defining clear cryptocurrency regulations. A recent blockchain festival conference indicates that crypto companies are already working closely with established guidelines from other countries, while major organisations like the European Union have established their own bills such as the Markets in Crypto-Assets Regulation (MiCA).
Yet American regulators remained locked in a jurisdictional tug-of-war over the classification of crypto assets. The FIT21 Bill seeks to address this by assigning oversight responsibilities to specific agencies: the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
While this might initially seem like an added burden for crypto exchanges striving to stay compliant, the pros of well-defined cryptocurrency regulations far outweigh the cons.
What is the FIT21 Crypto Bill?
At its core, the FIT21 Bill tackles the age-old question that has plagued the crypto industry for years — are cryptocurrencies securities or commodities? The answer, according to the bill, is both – with a nuanced approach.
The FIT21 Bill establishes three distinct categories for digital assets: digital commodities, restricted digital assets, and permitted payment stablecoins. This classification system effectively draws the regulatory boundaries that define the jurisdiction of the SEC and CFTC. The SEC will oversee digital assets classified as securities, while the CFTC will regulate commodities and derivatives.
Additionally, the FIT21 Bill aims to implement consumer protection measures, establish clear guidelines for cryptocurrency issuers and traders, and combat fraud and manipulation.
To say the FIT21 Crypto Bill is long overdue is an understatement. The lack of clear regulations has had a significant impact on the crypto industry, with major crypto exchanges facing uncertainty and even legal battles due to the murky definitions surrounding digital assets.
Crypto Exchanges Caught in the Regulatory Crossfire: A Recap
The ambiguity surrounding digital asset categorisation has allowed the SEC and CFTC to employ aggressive tactics against crypto exchanges. Let’s delve into some examples.
SEC vs. Coinbase (June 2023)
The SEC charged Coinbase with operating as an unregistered securities exchange, broker, and clearing agency. Their argument hinged on classifying digital assets as securities, implying that Coinbase had violated securities regulations by not registering with the Commission.
CFTC vs. Kucoin (March 2024)
The CFTC served Kucoin with four different charges. These include:
- Illegally dealing in off-exchange commodity futures transactions and leveraged, margined, or financed retail commodity transactions.
- Solicited commodity futures, swaps, and transactions without registering with the CFTC as a futures commission merchant (FCM).
- Operated a facility for trading or processing swaps without registering as a designated contract market (DCM) or swap execution facility (SEF).
- Failed to implement an effective customer identification program (CIP).
The CFTC’s case rested on classifying digital assets like Ether as commodities, justifying their jurisdiction over Kucoin.
CFTC vs. Falcon Labs (May 2024)
The CFTC pursued a similar lawsuit against Falcon Labs, the operator of the digital asset prime brokerage FalconX. The charges mirrored those against Kucoin, alleging that the brokerage failed to register with the CFTC as a futures commission merchant (FCM), claiming that digital assets were commodities.
The Aftermath: Enacting Compliant Measures
Following these lawsuits, the targeted crypto exchanges took swift action to address the compliance concerns raised by the Commissions. Falcon Labs settled its $1.7 million fine, improved customer information collection processes, and updated its KYC policies. Kucoin, too, improved its current process and implemented a better customer identification procedure.
These cases highlight a crucial point — clear regulations benefit not just crypto exchanges, but regulators themselves too. The ambiguity surrounding digital assets has undoubtedly hindered the effectiveness of the SEC and CFTC’s enforcement actions.
With the FIT21 Bill’s categorical approach, regulators will have a clearer framework to pursue violations, while exchanges will have a roadmap for achieving compliance. This, coupled with the growing industry demand for clear rules since 2022, suggests that the FIT21 Crypto Bill could be a win-win for regulators and crypto exchanges.
Crypto Exchanges Benefit From Clearer Regulations
While the FIT21 Bill imposes new compliance requirements, crypto exchanges stand to gain significant advantages from a well-defined regulatory framework. Here’s a closer look at what crypto exchanges like Kucoin and Coinbase can expect in terms of regulatory compliance with the FIT21 Bill:
- Dual Registration: Most crypto exchanges will need to register with the CFTC and SEC to manage digital assets categorised as commodities or securities.
- Separation of Funds: The FIT21 Crypto Bill could codify requirements for segregating customer funds from company funds. This will prevent another FTX fiasco where customer assets were mismanaged.
- Record-Keeping Enhancements: Crypto exchanges will need to implement stricter record-keeping practices that meet the SEC’s standards for books and records. This fosters transparency and helps prevent fraudulent activities.
- Wind-Down Plans: The bill might mandate the creation of wind-down funds. These funds would function as a safety net, protecting customer assets if the exchange shuts down.
These initial hurdles may seem daunting, but increased compliance ultimately benefits crypto exchanges in several ways:
- Enhanced Customer Confidence: By demonstrating a commitment to robust compliance practices, crypto exchanges can inspire greater trust and confidence among their users. This, in turn, can lead to increased user activity and platform growth.
- Improved Market Legitimacy: Clear regulations legitimise the cryptocurrency market as a whole. This can attract new investors and institutions, further fuelling market growth and innovation.
This is demonstrated by Kucoin’s growth after the initial lawsuit was served. The exchange saw an increase in its global user growth with 16.26% in Latin America, 11.29% in the Middle East and Africa, and 6.98% in Europe. The exchange also added another seventy-three new digital assets during the quarter.
A Turning Point for Crypto Regulation in the US
The FIT21 Bill has the potential to be a watershed moment for cryptocurrency regulations in the United States. It provides much-needed clarity for crypto companies, especially for global exchanges like Coinbase and Kucoin, plus it also signifies the maturation of the US crypto industry.
With a well-developed regulatory framework, these crypto exchanges can flourish in a healthy and secure environment, fostering responsible innovation while safeguarding the interests of consumers.
And maybe, just maybe, we will see an end to the SEC’s constant claims of cryptocurrencies as securities with the FIT21 Bill.
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