Regulating Digital Assets: FIT21 Seems to Fit the Bill
In Short
The Situation: The United States lacks a regulatory framework geared toward digital assets. This raises consumer protection concerns, causes regulatory turf battles and duplicative enforcement actions, impedes innovation, and puts the United States at a disadvantage compared to markets like the European Union, which have already implemented regulatory measures.
The Solution: Recently proposed (and likely soon to be re-proposed) legislation would split regulation of digital assets between the Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange Commission ("SEC") and impose clear disclosure, registration, and compliance requirements. This should better protect market participants, reduce or eliminate ostensibly duplicative regulatory burdens, and foster innovation by providing clarity as to the applicable regulatory structure for digital assets.
Looking Ahead: Though passed by the U.S. House of Representatives in the last Congress, this legislation—the Financial Innovation and Technology for the 21st Century Act ("FIT21" or the "Bill")—is still several steps from becoming law. Nevertheless, given the upswell of support for it in the new administration and Congress, FIT21 seems poised to become the framework for regulation of digital assets.
State of the Legislation
In May 2024, the House of Representatives passed FIT21. The Bill—which was received in the Senate, read twice, and then referred to the Committee on Banking, Housing, and Urban Affairs, but which was not enacted in the last Congress—is Congress's latest effort to regulate digital assets as a class.
In 2025, FIT21 is more relevant than ever as President Trump aims to make the United States "the crypto capital of the planet." His efforts include signing an executive order forming an executive branch working group on digital asset markets, nominating crypto-friendly Paul Atkins to replace former SEC Chairman Gary Gensler (a crypto skeptic), nominating former CFTC Commissioner Brian Quintenz—who has held multiple crypto roles—as CFTC Chairman, exploring the feasibility of a "Bitcoin Reserve," and appointing former PayPal executive David Sacks as the White House crypto and AI czar.
On February 4, 2025, Mr. Sacks held a joint press conference with several Congressional committee chairmen to discuss their goal of providing clear regulation of digital assets. French Hill, chairman of the House Financial Services Committee, stated his intent to present FIT21 for President Trump’s signature with only "modest changes"; he also emphasized the bill’s momentum because of its broad bipartisan support in the prior Congress. Senator Tim Scott, chairman of the Senate Committee on Banking, Housing, and Urban Affairs, stated that his goal is for the Senate to pass FIT21 in the first 100 days of the new Administration. Senator John Boozman, chairman of the Senate Agriculture, Nutrition, and Forestry Committee, highlighted the importance of collaborating across committees in their bicameral working group to advance FIT21. Mr. Sacks emphasized that clear rules of the road for digital assets would stop the flow of crypto startups out of U.S. markets. He criticized the SEC and other agencies for arbitrarily prosecuting companies without providing guidelines for their conduct.
Like prior bills, FIT21 outlines a regulatory framework based on a separation of responsibilities between the SEC and the CFTC, mandates joint rulemakings in certain areas of shared jurisdiction and permits other rulemakings to flesh out certain aspects of FIT21, and imposes enhanced disclosure, registration, and compliance requirements tailored to digital assets. FIT21 aims to remedy the existing confusion by using "clear definitions for digital assets, assign[ing] regulatory oversight, and establish[ing] fair compliance requirements."
What Does the Proposed Legislation Do?
Among other things, FIT21 is meant to reduce duplicative enforcement actions by providing regulatory clarity, combat fraud, and protect market participants by strengthening transparency and accountability. The Bill came at a time where, in the absence of clear statutory guidelines, both the SEC and the CFTC had claimed jurisdiction over some of the same digital asset activity. FIT21 would require the SEC and the CFTC to collaborate in discussing decentralization, creation, ownership, functionality, and other characteristics of a digital asset.
FIT21 would distinguish, through a thorough categorization process, between restricted digital assets, which would be regulated by the SEC, and digital commodities, which would be regulated by the CFTC. Further, FIT21 allows for a digital asset to initially be deemed a restricted digital asset and then later reclassified as a digital commodity if and when the digital asset becomes sufficiently functional and decentralized. FIT21 would also create a third category, permitted payment stablecoins, which would be excluded from the foregoing categories but subject to CFTC and SEC regulatory jurisdiction and SEC anti-fraud and anti-manipulation jurisdiction in certain cases.
Upon classification or re-classification of a digital asset, the digital asset framework would be regulated by the SEC as a restricted digital asset or by the CFTC as a digital commodity, respectively, each with its own set of disclosure, registration, and compliance requirements. In various situations, the underlying source code and technology of the digital asset, development plan(s) for the digital asset, and risks of owning the digital asset—among other things—must be disclosed, regardless of the asset's classification as a digital commodity or a restricted digital asset. FIT21 also introduces new registration categories and would require digital asset trading systems, digital asset brokers, and digital asset dealers transacting in restricted digital assets to register with the SEC, and digital commodity brokers, digital commodity dealers, and digital commodity exchanges transacting in digital commodities to register with the CFTC. Entities transacting in both restricted digital assets and digital commodities must register with both agencies, though the Bill requires the CFTC and SEC to seek to eliminate duplicative regulation in these circumstances.
FIT21 excludes DeFi activity from SEC and CFTC regulatory jurisdiction and establishes a process for classifying a system as decentralized, rebutting that classification, and appealing the rebuttal or withdrawing a decentralized certification.
FIT21 would also require the:
- CFTC and SEC to jointly establish a "Joint Advisory Committee on Digital Assets" to, among other things, harmonize digital asset policy between the commissions;
- SEC and CFTC to jointly carry out: (i) a DeFi study that analyzes 12 different issues, including the risks and benefits of DeFi; and (ii) a study on whether additional guidance or rules are needed to facilitate the development of tokenized securities and derivatives and related regulatory considerations (e.g., whether tokenization is consistent with investor protection); and
- Comptroller General to conduct: (i) its own separate study on those same 12 issues; and (ii) a study on non-fungible digital assets that analyzes 12 issues that overlap to some extent with the 12 issues to be considered in the DeFi study.
Reactions to the Proposed Legislation
Reactions to the Bill have been varied. Notably, FIT21 excludes investment contract assets (defined at its core as a fungible digital asset recorded on a public blockchain sold pursuant to an investment contract) from the definition of "security" under the federal securities laws.
This departure from longstanding precedent drew criticism by the SEC under former Chairman Gensler, who maintained that this aspect of FIT21 would "create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk."
By contrast, many leading voices in the digital assets industry have publicly voiced their support for FIT21. Crypto lobbyists also pushed heavily for enactment of FIT21, and almost half of all corporate donations during the 2024 presidential elections at one point originated from crypto companies. Senior Democratic legislators have expressed support for the Bill, with Nancy Pelosi calling it "a first step to establish a regulatory framework for digital assets." Despite a few contrarians, FIT21 will likely progress toward enactment, propelled by encouragement from both Congress and the new administration.
Five Key Takeaways
- FIT21 would change the regulatory landscape of digital assets. The Bill would create new legal categories of digital assets and divide jurisdiction between the CFTC and SEC, effectively reducing overlapping authority.
- FIT21 is more "hands on" with market regulators. The Bill includes a mechanism to force the CFTC and SEC to characterize digital assets as CFTC- or SEC-jurisdictional and thereby clarifies which regulator is to have oversight. This legal certainty will make digital asset issuers, intermediaries, and other market participants comfortable doing business in the United States rather than only in foreign jurisdictions (which a number of companies have done due to the current uncertainty).
- FIT21 now enjoys more support. The new administration's crypto-friendly actions suggest that the White House will support it becoming law; Congressional leadership has also expressed that the Bill is a top priority.
- FIT21 imposes new registration requirements. The Bill is touted as a boon to innovation, but requires registration for various activities, although it also commands the SEC and CFTC to reduce compliance burdens in situations where new registrants are registered with the CFTC or SEC in similar capacities.
- FIT21 requires or permits rulemaking by the CFTC and SEC on a number of issues. The agencies historically have not been quick to reach agreement on jurisdictional issues, although it would seem the desire at the highest levels of government for a U.S. crypto regime will speed negotiations. Nevertheless, assigning rulemaking duties to the SEC and CFTC may mean that the complete digital assets oversight regime will not in place for at least a year, if not two.
