The impact of FIT21 on the crypto ecosystem

Just before the SEC approved the regulatory documents for the Ethereum spot ETF, the U.S. House of Representatives passed the FIT21 Act, which guides U.S. regulators to regulate crypto assets.

There is not much discussion about this bill online, but in fact it has a profound impact on the U.S. government's future regulation of crypto assets. It is also a bill that crypto project teams must carefully study before issuing crypto assets in the United States in the future.

I have excerpted some interesting clauses.

This bill clearly defines that there are two institutions that regulate crypto assets: one is the U.S. Commodity Futures Trading Commission CFTC, and the other is the U.S. Securities and Exchange Commission SEC.

How do these two institutions regulate crypto assets?

The bill stipulates that if a crypto asset is defined as a commodity, it is regulated by the CFTC; if it is defined as a security, it is regulated by the SEC.

How do you determine whether a crypto asset is a commodity or a security?

The bill proposes several key elements to distinguish whether a digital asset is a security or a commodity: including "investment contract (The Howey Test)", "use and consumption", "degree of decentralization", "functional and technical characteristics", and "market activities".

Among these elements, except for the "degree of decentralization", the other elements are easy to understand in terms of definition and belong to the definition of traditional commodities or securities. Only the "degree of decentralization" is a new concept introduced by blockchain technology and crypto assets.

What is considered "decentralized"?

The bill stipulates (roughly): If no one has direct control and holds no more than 20% of tokens/voting rights in the past 12 months, it is decentralized.

This definition of "decentralization" actually provides a reference standard for us to speculate on the targets that may be targeted by Wall Street institutions in the future.

It is an unstoppable trend that crypto assets are introduced to traditional finance by Wall Street institutions in a compliant manner and attract a wide range of people.

Bitcoin and Ethereum have been successfully demonstrated by Wall Street institutions and incorporated into the regulatory system of the US government. In the future, more and more crypto assets will be similarly operated by Wall Street.

In fact, clear and appropriate supervision can not only promote the healthy and long-term development of the crypto ecosystem, but also promote the value and price of crypto assets to rise step by step.

So I have always believed that we don't need to panic or resist this, but should take a positive attitude towards reasonable and appropriate supervision. Frankly speaking, I have a very positive view of Wall Street's two spot ETF operations on Bitcoin and Ethereum (although I don't like these institutions at all).

This is the bill from the perspective of Wall Street and regulation.

From the perspective of the crypto project team, how can this bill be viewed?

First of all, in the entire crypto ecosystem, crypto assets like Bitcoin that do not rely on team operations are a minority after all, and more are projects like Ethereum that must be developed under the leadership of a team.

Therefore, in the future, any crypto team must consider what kind of supervision they may face when issuing their own assets.

Of the two agencies, SEC and CFTC, CFTC’s supervision is much more relaxed and inclusive. Therefore, for general project parties, unless there is a specific purpose (such as issuing securities), they generally hope that the tokens they issue will be regulated by CFTC.

If the project party hopes that the tokens they issue will be regarded as "commodities" and regulated by CFTC, then according to the above excerpts, a standard unique to the crypto ecosystem is worth noting: "the degree of decentralization".

For users of the crypto ecosystem, when we talk about "decentralization", it is generally to emphasize that the project is free from interference and manipulation by monopoly forces; and in this bill, it has become an important criterion for defining whether crypto assets are commodities or securities.

According to this idea, if the project parties want their tokens to pass the supervision as much as possible, they must do enough work in the aspect of "decentralization". At least they cannot monopolize the chips and do whatever they want through market manipulation and market making as in the past.

As investors, what do we think of this bill?

We can use it as a reference for reviewing investment targets.

For example, if a token is regarded as a commodity, to some extent we can also think that it is sufficiently "decentralized"; conversely, if a token is sufficiently "decentralized" for users in the crypto ecosystem, to some extent we can also infer that it is likely to be identified as a commodity, thus passing the CFTC review relatively easily.

According to this standard, we carefully examine the current popular blockchain tokens (such as BNB, Solana, Aptos, SUI, MATIC, ...), classic ERC-20 tokens (UNI, CRV, MAKER, AAVE, ...) and emerging inscription tokens (ORDI, SATS, ...), and then combine other judgment conditions (investment contract, use and consumption, functional and technical characteristics, market activities), we can at least roughly guess which of these tokens are likely to pass the review more easily based on the judgment criteria.