About the FIT21 Bill: Background, Content, and Impact
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About the FIT21 Bill: Background, Content, and Impact
Once officially enacted, the FIT21 bill will become a significant milestone in the U.S. federal regulatory framework for digital assets.
Navigating Web3 tides with focused insightsAuthor: Ray, TaxDAO
On May 22, 2024, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21) by a vote of 279 to 136. Led primarily by Republicans, this legislation aims to amend existing securities and commodities regulations by establishing a federal regulatory framework for digital assets to promote the growth of the cryptocurrency industry. If formally enacted, FIT21 would become a landmark in the development of the United States' federal digital asset regulation. This article provides an analysis of the FIT21 bill from the perspectives of legislative background, content, and potential implications.
1. Legislative Background of the FIT21 Bill
Since the mining of Bitcoin’s genesis block, crypto-based digital assets have existed and evolved for fifteen years, currently entering a dynamic and increasingly mature phase. However, neither the United States nor other countries have yet established comprehensive regulatory frameworks for digital assets, relying instead on fragmented and piecemeal oversight. Such an approach fails to create a stable and predictable legal environment for the crypto industry, while enabling various illegal and criminal activities that severely hinder innovation and progress within the sector. Critics argue that under the current U.S. regulatory model, crypto startups face “enforcement-driven regulation,” which may push companies to relocate their operations overseas—undermining both technological innovation and broader economic development in the United States. Therefore, there is an urgent need for legislative action to foster an innovation-supportive environment, unlock the future potential of the crypto industry, and avoid replicating the Web 2.0-era scenario where a few large tech firms dominate the market.
In September 2022, the White House released its "First-Ever Comprehensive Framework for Responsible Development of Digital Assets," urging the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to establish specific rules governing digital assets. The legislative origins of FIT21 can be traced back to March 2023, when Representative French Hill, chair of the Digital Assets, Financial Technology, and Inclusion Subcommittee, began working with the House Committee on Agriculture to develop a regulatory framework for digital assets. In July of the same year, both the House Committee on Financial Services and the House Committee on Agriculture approved the FIT21 bill. It was not until May 2024, however, that the full House completed its voting process on the bill. FIT21 will soon be submitted to the Senate for consideration and, if passed, will proceed to the President for signature and enactment.
Recent developments surrounding SAB 121 (Staff Accounting Bulletin No. 121) have further heightened expectations among Congress and the crypto industry regarding the FIT21 bill. The SEC issued SAB 121 in 2022, requiring digital asset custodians to treat digital assets as liabilities and carry them at fair value on their balance sheets. Under this guidance, banks wishing to hold digital assets would need to maintain cash reserves equal to the fair value of those assets—a provision widely seen as excessive regulatory overreach that effectively excludes traditional banking institutions from participating in the crypto ecosystem. In mid-May 2024, shortly before the SEC shifted its stance on spot ETH ETFs, both chambers of Congress moved to pass legislation repealing SAB 121. However, President Biden vetoed the repeal on May 31, disappointing lawmakers and industry stakeholders alike, who now place greater hopes on the pending FIT21 bill, which still awaits Senate approval and presidential signature.
2. Overview of the FIT21 Bill Content
The FIT21 bill consists of multiple chapters addressing different aspects of digital asset regulation and innovation. This section outlines the key components of each chapter and summarizes the overall regulatory structure proposed by the bill.
2.1 Chapter-by-Chapter Summary of the FIT21 Bill
Chapter I of the FIT21 bill is titled "DEFINITIONS; RULEMAKING; NOTICE OF INTENT TO REGISTER." It defines key terms used across major financial laws such as the Securities Act of 1933, the Securities Exchange Act of 1934, and the Commodity Exchange Act. These definitions include concepts like "digital asset," "blockchain," and "decentralized system," clarifying the scope of application of the legislation.
Chapter II focuses on digital assets that form part of investment contracts. Section 202 describes these assets as interchangeable digital representations of value and sets forth classification and regulatory treatment distinct from traditional securities.
Chapter III establishes rules governing the offering and sale of digital assets. Specifically, Section 301 outlines exemptions for certain digital asset transactions, Section 302 details requirements applicable to offerings and sales, and Section 303 strengthens disclosure obligations related to digital assets and their underlying blockchain systems.
Chapters IV and V address registration requirements for digital asset intermediaries under the jurisdiction of the SEC and CFTC. Covered entities include digital asset exchanges, brokers, dealers, and custodians. Provisions cover business qualifications such as certification and licensing, general and special conditions for registration, exemptions, and conflict-of-interest rules.
Chapter VI, titled "INNOVATION AND TECHNOLOGY IMPROVEMENTS," reflects the bill’s pro-innovation intent. Under this chapter, the SEC will establish its FinHub (Strategic Center for Innovation and Financial Technology), while the CFTC will continue operating LabCFTC. According to FIT21, these centers are tasked with shaping how the agencies examine fintech innovations and assess regulatory impacts on emerging technology firms. While both centers engage with stakeholders and provide information about rules and regulations, the wording of FIT21 suggests Congress does not intend them to function as active regulatory sandboxes, as neither agency is granted explicit discretionary authority to relax enforcement or waive compliance.
2.2 Regulatory Framework Established by FIT21
Overall, FIT21 seeks to establish a federal regulatory framework for digital assets by clearly delineating the responsibilities of the SEC and CFTC, updating existing securities and commodities laws, and regulating various blockchain technologies—including decentralized protocols. Some observers draw parallels between FIT21’s innovation protections and the regulatory reforms implemented in the aftermath of the 1920s Great Depression, which ushered in a period of unprecedented economic growth and technological advancement in the United States.
The regulatory framework established by FIT21 includes four main elements: First, the CFTC must regulate digital assets as commodities if they operate on a functional and decentralized blockchain or cryptographic ledger. Additionally, the bill grants the CFTC exclusive oversight authority over crypto commodity and spot markets. Second, when a blockchain is functional but not sufficiently decentralized, the SEC must regulate the associated digital assets as securities. FIT21 includes certain exceptions for SEC regulation based on annual sales volume and qualified investor criteria, and specifies requirements for primary and secondary market transactions. Third, the SEC and CFTC are required to jointly issue rules to prevent duplicative or conflicting regulations for exchanges. Fourth, permitted payment stablecoins are excluded from the regulatory purview of both the CFTC and SEC, except with regard to anti-fraud provisions and registration obligations for certain entities.
3. Interpretation of Sections 101 and 103 of the FIT21 Bill
Clear definitions are prerequisites for effective action. Sections 101 and 103 of the FIT21 bill define restricted digital assets (i.e., securities-like assets), digital commodities, and permitted payment stablecoins, providing concrete criteria for classification. These definitions enable the SEC and CFTC to clearly delineate their respective jurisdictions—allowing the SEC to oversee restricted digital assets, the CFTC to regulate digital commodities, and excluding permitted payment stablecoins from both agencies’ oversight. This foundational categorization paves the way for targeted regulatory and supervisory measures, offering the crypto industry a more structured regulatory environment and greater stability for long-term development. Overall, FIT21 divides digital assets into three categories: restricted digital assets, digital commodities, and permitted payment stablecoins. A digital asset generally falls under the category of restricted digital asset unless it qualifies as a digital commodity or meets the definition of a permitted payment stablecoin.
3.1 Digital Asset
Section 101(26) first defines a "digital asset" and lists exclusions. It states that a digital asset "means any fungible digital representation of value that can be wholly owned and transferred by an individual without reliance on an intermediary and is recorded on a cryptographically secure public distributed ledger." However, the definition explicitly excludes instruments such as notes, stocks, treasury shares, securities futures, securities swaps, bonds, debt instruments, evidences of indebtedness, puts, calls, straddles, options, privileges, and any instrument equivalent to options, futures, or swaps.
Two critical clarifications are emphasized in Section 101: First, "nothing in this paragraph shall be construed to presume that a digital asset is representative of any type of security not excluded from the definition of digital asset." This underscores FIT21’s strict definitional approach, clearly distinguishing digital assets from other forms of securities. Second, "a digital asset offered or sold, or intended to be offered or sold, pursuant to an investment contract is not, and shall not become, a security by virtue of being sold or otherwise transferred pursuant to that investment contract." To understand this, one must consider the Howey Test. The U.S. legal concept of "security" originated from the term "investment contract" in the Howey Test, one prong of which requires that profits derive solely from the "efforts of others." Under this standard, returns depend heavily on the efforts of promoters or third parties, while investors merely contribute capital without participating in management. However, many digital assets are issued and managed via smart contracts and automated systems, eliminating traditional promoter involvement. By excluding such assets from the definition of securities, FIT21 aims to encourage technological innovation while maintaining investor protection.
3.2 Restricted Digital Asset
Section 101(34) defines "restricted digital asset" using three criteria: (1) the degree of decentralization and functionality of the underlying blockchain system; (2) the method by which end users acquire the digital asset; and (3) the identity of the holder. Clarifying these standards helps distinguish restricted digital assets from other types of digital assets. Notably, although the term "security" is avoided, "restricted digital asset" essentially refers to assets possessing securities-like characteristics. For example, Section 405 explicitly states that securities include restricted digital assets.
As outlined in Section 101(25), assessing decentralization and functionality involves five factors: (1) Control and Influence: No individual or entity has had unilateral control or substantial influence over the blockchain’s operation or functionality during the past 12 months. (2) Distribution of Ownership and Governance Rights: During the past 12 months, no issuer or affiliate collectively held more than 20% of the total supply of the digital asset or controlled 20% or more of the circulating voting power in the asset or its decentralized governance system. (3) Code Modifications: No issuer or affiliate has unilaterally or materially modified the source code of the blockchain in the past three months in a way that alters its functionality or operation, except for modifications made to fix bugs, perform routine maintenance, mitigate cybersecurity risks, or improve technology. (4) Marketing: No issuer or affiliate has marketed the digital asset to the public as an investment in the past three months. (5) End User Distribution: Units of the digital asset were issued programmatically through the blockchain system directly to end users. As defined in Section 101(30), "end user distribution" means broad, fair, and non-discretionary allocation accessible to all participants in the network—such as rewards from mining or staking.
Among these criteria, the "12-month" and "20%" thresholds are particularly significant—the former serving as a longitudinal benchmark for decentralization, the latter as a cross-sectional measure. While the exact numerical values (e.g., whether 12 vs. 15 months or 20% vs. 30%) are less important, what matters most is that they provide clear, quantifiable metrics, making assessments of decentralization more objective.
Regarding acquisition methods, a restricted digital asset must have been distributed to users in a manner that is not end-user distribution, or acquired by users outside of a digital commodity exchange.
Finally, a restricted digital asset also includes all units held by the issuer or affiliates during periods when the blockchain lacked functionality or had not yet achieved decentralization. Permitted payment stablecoins are exempt from this category.
3.3 Permitted Payment Stablecoin
Section 101(32) defines a "permitted payment stablecoin" as a digital asset designed or used as a medium of payment or settlement, whose issuer is obligated to convert, redeem, or repurchase it for a fixed monetary value, or represents that it will maintain or is reasonably expected to maintain a stable value relative to a fixed amount of currency. The issuer must be subject to supervision by a qualified federal or state regulator, and the stablecoin itself must not constitute national currency or a security. The referenced monetary value includes domestic currency, deposits, or equivalent instruments denominated in domestic currency. This definition indicates that FIT21 emphasizes the importance of licensing for payment stablecoins and implies that only fiat- or deposit-backed stablecoins may qualify—excluding algorithmic stablecoins from eligibility.
3.4 Digital Commodity
Section 103(55) defines "digital commodity" under three scenarios: (1) Any unit of a digital asset held by individuals other than the issuer or affiliates before the relevant blockchain becomes functional and is certified as decentralized, provided the asset was obtained through end-user distribution or on a digital commodity exchange; (2) Any unit of a digital asset held by persons other than the issuer or affiliates after the blockchain becomes functional and decentralized; and (3) Any unit held by affiliates during the period when the blockchain is functional and decentralized. Digital commodities do not include permitted payment stablecoins. Notably, the bill includes a special provision stating that if, prior to the enactment of FIT21, a federal court has ruled that a particular digital asset is not a security, then that asset shall be deemed a digital commodity for as long as the ruling remains valid. This highlights FIT21’s fundamental dichotomy—after excluding permitted payment stablecoins, the law treats digital assets primarily as either securities (restricted digital assets) or commodities.
4. Potential Impacts of the FIT21 Bill Upon Passage
4.1 Impact of FIT21 on Crypto Taxation
Under IRS Notice 2014-21, all cryptocurrencies are treated as property rather than currency, meaning general tax principles applicable to property transactions apply. However, the IRS's definition of crypto assets is broad, encompassing "any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology." FIT21 provides clearer criteria for the IRS to determine the scope of crypto assets and classify them as either digital commodities or restricted digital assets (securities-like). This clarity will assist the IRS in applying appropriate tax treatments based on distinctions between ordinary income and capital gains.
Importantly, FIT21 deliberately avoids using the term "security" to describe restricted digital assets. Consequently, certain tax rules with narrow applicability to securities do not extend to these assets. For instance, U.S. tax law allows investors to offset capital gains with capital losses but strictly prohibits wash sales—where an investor sells an asset at a loss and repurchases a substantially identical security within 30 days. The term "security" in this context includes stocks, bonds, mutual funds, ETFs, options, futures, and warrants. Because FIT21 uses the term "restricted digital asset" instead of "security," crypto assets remain excluded from wash sale restrictions, allowing greater flexibility in tax-loss harvesting strategies.
4.2 Impact of FIT21 on Crypto Regulation
In terms of regulatory authorities and scope, FIT21 aims to eliminate ambiguity by clearly distinguishing between restricted digital assets, digital commodities, and permitted payment stablecoins, thereby assigning well-defined oversight roles to the SEC and CFTC. This division enhances regulatory coherence and prevents jurisdictional overlap or conflict.
Regarding regulatory substance, FIT21 mandates that both the SEC and CFTC oversee registration processes for digital asset entities, strengthen disclosure requirements, implement anti-money laundering (AML) frameworks, and enforce anti-fraud mechanisms—thereby deepening the regulatory toolkit available for overseeing the crypto ecosystem.
In terms of regulatory philosophy, FIT21 adopts a flexible and inclusive approach, balancing innovation promotion with investor and consumer protection. By creating a stable and supportive environment for the crypto industry, the bill is likely to attract more entrepreneurs, developers, and businesses to the United States, enhancing domestic innovation and strengthening America’s global financial competitiveness.
5. Conclusion
Although the final passage of the FIT21 bill remains uncertain, the strong bipartisan support demonstrated by the House vote signals a growing legislative openness toward digital assets. This friendliness does not imply deregulation; rather, the U.S. seeks to use FIT21 to foster healthy growth in the crypto market through a stable and effective regulatory regime. Going forward, the SEC and CFTC are expected to deepen their engagement with DeFi and traditional financial markets, explore integration with NFTs, enhance investor financial literacy, and strengthen the infrastructure of blockchain-based financial systems—protecting investor rights while maximizing the positive impact of digital assets and blockchain technology on economic development.
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