It’s here, we’re back with yet another breakdown of a crypto bill in Congress and the question remains, will this be the one?
A new crypto bill named the ‘Fit for the 21st Century Act of 2023’ is in Congress and is the first crypto regulation bill to finally pass through the House Financial Services Committee, and has also passed the House Agriculture Committee. Prepare yourself because this is going to be a raw, technical, turn your brain into mush kind of breakdown, but we’ll try and make it as bearable as possible.
So Let’s dive in. This bill aims to provide a clear regulatory framework for digital assets and blockchain technology, addressing key issues such as definitions, exemptions, and requirements for digital asset transactions.
Key Definitions and Concepts
The bill begins by defining key terms and concepts related to digital assets and blockchain technology. Some of the most important definitions include:
- Digital Asset: A fungible digital representation of value that can be exclusively possessed and transferred, person to person, without necessary reliance on an intermediary, and is recorded on a cryptographically secured public distributed ledger.
- Blockchain: A technology where data is shared across a network to create a public ledger of verified transactions or information among network participants, linked using cryptography, and distributed among network participants in an automated fashion.
- Decentralized Network: A blockchain system where no person has unilateral authority to control or materially alter the functionality or operation of the blockchain system, restrict or prohibit any person from using the digital asset, and where no digital asset issuer or affiliated person beneficially owns 20% or more of the total amount of units of the digital asset.
- Digital Asset Issuer: Any person that, in exchange for any consideration, issues or causes to be issued a unit of a digital asset to a person, or offers or sells a right to a future issuance of a unit of such digital asset to a person.
- Affiliated Persons: Defines an affiliated person as someone who controls or is controlled by a digital asset issuer, or owns 5% or more of the units of a digital asset.
- Blockchain Protocol: Defines blockchain protocol as any executable software deployed to a blockchain composed of publicly available source code, including smart contracts or networks of smart contracts.
- Decentralized Governance System: Defines a decentralized governance system as any rules-based system permitting persons using the blockchain system or the digital assets related to such blockchain system to form consensus or reach agreement in the development, provision, publication, management, or administration of such blockchain system.
- Digital Asset Maturity Date: Defines the digital asset maturity date as the first date on which 20% or more of the total units of a digital asset that are then outstanding are digital commodities or digital assets that have been registered with the Commission.
- Digital Commodity: Refers to the definition of digital commodity under section 1a of the Commodity Exchange Act.
- End User Distribution: Defines an end user distribution as an issuance of a unit of a digital asset that does not involve an exchange of more than a nominal value of cash, property, or other assets, and is distributed in a broad, equitable, and non-discretionary manner based on conditions capable of being satisfied by any participant in the blockchain system.
- Functional Network: Defines a functional network as a blockchain system that allows network participants to use a digital asset for the transmission and storage of value on the blockchain system, participation in services provided by or an application running on the blockchain system, or participation in the decentralized governance system of the blockchain system.
- Permitted Payment Stablecoin: Defines a permitted payment stablecoin as a digital asset that is or is designed to be used as a means of payment or settlement, the issuer of which is obligated to convert, redeem, or repurchase for a fixed amount of monetary value, or represents will maintain or creates the reasonable expectation that it will maintain a stable value relative to the value of a fixed amount of monetary value, and that is subject to regulation by a Federal or State regulator with authority over entities that issue payment stablecoins.
Exemptions and Requirements for Digital Asset Transactions
In sections 201 through 204, the bill introduces exemptions and requirements for digital asset transactions.
Exempted Transactions
The bill provides exemptions for transactions involving the offer or sale of digital assets by a digital asset issuer, under certain conditions. The exemption applies if the aggregate amount of digital assets sold by the issuer in reliance on the exemption, during the 12-month period preceding the transaction, is not more than $75,000,000 (adjusted annually for inflation).
For transactions involving non-accredited investors, the aggregate amount of digital assets purchased by such person during the 12-month period preceding the transaction – including the unit purchased in the transaction – must not exceed 10% of the person’s annual income or net worth.
Requirements and Sales of Digital Assets
The “Fit for the 21st Century Act of 2023” introduces specific requirements for the offer and sale of certain digital assets.
Restricted digital assets (which are units of digital assets held by persons other than the digital asset issuer, related persons, or affiliated persons) can be offered and sold on a digital asset trading system if the blockchain system is a functional network and the information has been certified and made publicly available.
However, restricted digital assets owned by a related person or an affiliated person may only be offered or sold after 12 months after the date of acquisition or the digital asset maturity date. Digital commodities, on the other hand, can be offered and sold by any person, with specific rules for related and affiliated persons.
End user distributions of digital assets are exempt from certain securities laws if the blockchain system is a functional network and the information has been certified and made publicly available.
Enhanced Disclosure Requirements
The bill introduces enhanced disclosure requirements for digital assets, which aim to provide greater transparency and accountability in the industry. The required disclosure information includes the source code for the blockchain system, transaction history, digital asset economics, plan of development, development disclosures, and risk factor disclosures.
This information is crucial for investors to make informed decisions and for regulators to monitor the industry effectively. The information must be certified on a quarterly basis to the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), ensuring that the information is up-to-date and accurate.
Certification of Certain Digital Assets
The bill allows any person to certify to the SEC that the blockchain system to which a digital asset relates is a decentralized network.
The certification must include information regarding the person making the certification, a description of the blockchain system and the digital asset, a description of the development of the blockchain system and the digital asset, and an analysis of the factors on which the certification is based.
The Commission may rebut a certification if it determines within 30 days of receiving such certification that the blockchain system is not a decentralized network.
Any blockchain system that relates to a digital asset for which a certification has been made shall be considered a decentralized network 30 days after the date on which the Commission receives a certification.
This is unless the Commission notifies the person who made the certification within such time that the Commission is staying the certification due to an inadequate explanation by the person making the certification or any novel or complex issues which require additional time to consider.
What This Bill Means For The Future of Crypto
We believe that the implementation of this bill would have big implications for the future of crypto. By providing a clear regulatory framework for digital assets and blockchain technology, the bill will likely encourage more businesses and investors to enter the industry.
One other key point to note is that this bill establishes Joint Advisory Committee on Digital Assets which will help to harmonize digital asset policy between the CFTC and SEC, reducing regulatory uncertainty and fostering innovation in the industry.
The bill’s focus on decentralization, functionality, and transaction and network security will likely lead to the development of more secure and efficient blockchain systems. The exemptions and requirements for digital asset transactions will also help to protect investors and ensure that the industry operates in a transparent and accountable manner.
In conclusion, the “Fit for the 21st Century Act of 2023” represents a significant step forward for the crypto and digital assets industry. By providing a clear regulatory framework and encouraging innovation, the bill will likely help to shape the future of the industry and ensure that it continues to grow and thrive. To tie it all together we believe this bill, were it to be passed, would be very bullish for the crypto market, and the industry as a whole.