FIT21 (Financial Innovation and Technology for the 21st Century Act)

The Financial Innovation and Technology for the 21st Century Act, universally known as FIT21, was passed by the US House of Representatives on May 22, 2024, by a bipartisan vote of 279 to 136. The legislation represented the most comprehensive attempt by any US Congress to resolve the fundamental question that has dominated crypto regulation since Bitcoin’s emergence: which federal agency has jurisdiction over which crypto-assets, and under which legal framework?

Legislative Origins

FIT21 was developed primarily by the House Agriculture Committee and the House Financial Services Committee, reflecting the bifurcated nature of US financial regulation in which the CFTC (under Agriculture Committee jurisdiction) and the SEC (under Financial Services Committee jurisdiction) share oversight of financial markets. The bill was sponsored by Representative Glenn Thompson and Representative Patrick McHenry, with significant technical contributions from committee staff with expertise in commodity and securities law.

The bill’s origins can be traced to years of industry advocacy for legislative clarity following the SEC’s enforcement-first approach to crypto regulation under Chair Gary Gensler. Major exchanges and token issuers faced ongoing SEC investigations and enforcement actions premised on the theory that most tokens are investment contracts — securities — subject to SEC registration and disclosure requirements. Industry argued that this approach was legally incorrect for decentralized networks and that it stifled innovation.

The Decentralization Test

FIT21’s most significant contribution to crypto regulatory theory is the decentralization test — the mechanism by which a digital asset is classified as either a digital commodity (subject to CFTC jurisdiction) or a digital asset security (subject to SEC jurisdiction).

Under FIT21, a digital asset associated with a sufficiently decentralized blockchain network is a digital commodity, regardless of how it was initially offered. A blockchain system is “decentralized” for these purposes if no person or group of affiliated persons has unilateral authority to control or substantially alter the functional operation of the blockchain system, and if no issuer or affiliated person owns more than 20% of the tokens or controls 20% or more of the voting power.

This test operationalizes an intuition that SEC officials had previously articulated informally: Bitcoin is a commodity because no one controls it, while tokens issued by centralized companies might be securities because the purchaser depends on the issuer’s ongoing efforts for value. FIT21 attempted to turn this intuition into a workable legal standard.

CFTC Spot Market Jurisdiction

A central provision of FIT21 grants the CFTC jurisdiction over spot markets for digital commodities — a power the CFTC had long claimed it lacked under existing law, which gives the CFTC comprehensive oversight of derivatives markets but only anti-fraud and anti-manipulation authority over commodity spot markets.

Under FIT21, digital commodity exchanges would register with the CFTC and comply with requirements analogous to those applicable to designated contract markets: customer asset segregation, position limits, reporting, and market surveillance. This extension of CFTC authority was welcomed by the CFTC and by major exchanges that preferred CFTC oversight to what they viewed as more restrictive SEC requirements.

Ancillary Assets

FIT21 introduced the concept of “ancillary assets” — digital assets that are offered or sold by a company that retains ongoing obligations to the asset holder, but where the asset itself is used for a functional purpose in a blockchain network. Ancillary assets receive a disclosure-based regime overseen by the SEC but without the full securities registration and broker-dealer requirements that apply to traditional securities.

This category was designed to address the situation of tokens that are sold by companies with ongoing obligations — creating potential securities characteristics — but that also have genuine utility in their networks. The ancillary asset concept allows for a transitional treatment while the network matures toward the decentralization threshold.

The Biden Veto Threat and Senate Failure

Despite the bipartisan House majority — 71 Democrats joined the Republican majority in supporting FIT21 — the Biden administration issued a Statement of Administration Policy indicating the President’s advisors would recommend a veto. The administration’s concerns centered on investor protection, arguing that the bill’s CFTC-centered framework was inadequate to protect retail consumers and that the decentralization test could be manipulated.

The Senate took no action on FIT21 during the 118th Congress. Banking Committee Chairman Sherrod Brown, a consistent skeptic of crypto legislation, did not advance the bill through his committee.

Legacy: Foundation for the CLARITY Act

Despite not becoming law, FIT21’s conceptual architecture — the decentralization test, CFTC spot market jurisdiction, the ancillary asset concept, and the functional approach to token classification — became the foundation for the CLARITY Act developed in the 119th Congress. The CLARITY Act refined and in some respects expanded on FIT21’s framework while seeking to address the investor protection concerns that had generated the veto threat.

FIT21’s passage by a 279-136 House majority demonstrated that bipartisan legislative consensus on crypto regulation was achievable. It remains the most significant crypto legislation enacted by any chamber of the US Congress to date.