Interpretation of the FIT21 Bill: Definition of Digital Assets and Its Regulatory Framework

Recently, the U.S. House of Representatives passed the FIT21 Act with a vote of 279 to 136. The full name of the act is "21st Century Financial Innovation and Technology Act," which aims to establish a regulatory framework for digital assets and could become significant legislation with far-reaching implications for the cryptocurrency industry.

Division of Regulatory Responsibilities

The bill classifies digital assets into two categories: digital goods and securities. Based on this classification, regulatory responsibilities are borne by two main agencies:

• The Commodity Futures Trading Commission (CFTC) is responsible for regulating the trading of digital commodities and related market participants.
• The Securities and Exchange Commission (SEC) is responsible for regulating digital assets that are considered securities and their trading platforms.

Definition of digital asset

The FIT21 Act defines "digital asset" as a form of interchangeable digital representation with the following characteristics:

• Peer-to-peer transfers can be made without relying on intermediaries.
• Record on a cryptographically protected public distributed ledger

This definition encompasses a wide range of digital forms, from cryptocurrencies to tokenized real-world assets.

Distinction Between Goods and Securities

The bill proposes several key elements to distinguish whether a digital asset belongs to securities or commodities:

1. Investment Contract (Howey Test): If the purchase of a digital asset is considered an investment and the investor expects to profit from the efforts of a third party, the asset is typically regarded as a security.

2. Use and Consumption: If digital assets are primarily used as a medium for consumption goods or services, they may be classified as commodities or non-security assets.

3. Degree of decentralization: Digital assets behind a highly decentralized network are more likely to be viewed as commodities.

4. Functions and Technical Features: The technical construction and functional implementation methods of digital assets are also classification criteria.

5. Market Activities: If assets are primarily marketed based on the expected returns from investments, they may be considered as securities.

Standards for Defining the Degree of Decentralization

1. Control: No individual or entity has been able to unilaterally control or materially change the system functionality in the past 12 months.

2. Ownership Distribution: In the past 12 months, no individual or entity has owned more than 20% of the total issuance.

3. Voting rights and governance: In the past 12 months, no individual or entity has been able to influence more than 20% of the voting rights.

4. Code Contribution: The issuer has not made any substantial unilateral modifications to the system source code (excluding security maintenance) in the past 3 months.

5. Marketing: The issuer has not promoted the digital asset to the public as an investment in the past 3 months.

Considerations of Features and Technical Characteristics

The connection between digital assets and underlying blockchain technology determines its regulatory direction:

• Asset issuance: Issued through the programmatic mechanisms of blockchain.
• Transaction validation: Verifying and recording transactions through consensus mechanisms.
• Decentralized governance: Some projects allow token holders to participate in decision-making.

If digital assets primarily provide economic returns through blockchain automation programs or allow voting participation in governance, they may be considered securities. If primarily used as a medium of exchange or for acquiring goods and services, they may be classified as commodities.

Programmatic Issuance Features

Even if digital assets are sold or transferred according to the terms of the investment contract, if they are automatically issued through a programmatic blockchain system, they do not automatically become securities. This is because:

• Programmatic operations reduce the direct control of individuals or groups over the operation of digital assets.
• The decentralized nature ensures that asset operations follow predetermined rules.
• The issuance methods such as smart contracts make the rules and logic open and transparent.

Handling of Governance and Voting Functions

For digital assets with governance and voting functions, it is necessary to balance the degree of decentralization with investors' control or economic interest expectations:

• Highly decentralized (such as no entity controlling more than 20% of voting rights) tends to favor commodity characteristics.
• However, if voting rights have a substantial impact on the value and operation of the assets, they may be considered securities.

The key lies in assessing the substantial impact of voting rights and the primary purpose of the holders (economic returns or functional use).

Technical and Innovation Support

1. Expand the SEC's FinHub and the CFTC's LabCFTC to promote the formulation of fintech-related policies.

2. Establish a joint advisory committee between CFTC and SEC, focusing on digital asset issues.

3. Study the development of decentralized finance (DeFi) and its impact on traditional financial markets.

4. Explore the role of non-fungible tokens (NFTs) in financial markets and regulatory requirements.

These measures indicate that regulators are actively promoting the compliance of the cryptocurrency industry, laying the groundwork for future regulation of emerging areas such as DeFi and NFTs.