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House Passes FIT 21 With Massive Bipartisan Vote

Weekly Crypto Policy Brief - 5.24.24

Good morning and happy unofficial start of summer. In a massive show of support for improving the status quo, 279 Members of Congress voted to pass a comprehensive crypto market structure bill.

Top Points

  • The House passed FIT 21 by a 279-136 vote, with 71 Democrats joining nearly all Republicans in supporting new rules tailored for digital assets.

  • The House also passed a bill to prohibit the Fed from issuing, or even developing, a CBDC by a nearly straight party-line vote of 216-192.

  • The SEC approved critical regulatory filings for eight spot Ether ETPs, effectively recognizing Ether is not a security; next step is for the SEC to approve the ETP's S-1 registration statements before trading can begin.

  • Earlier in the week, House Financial Services Chair Patrick McHenry (R-NC) led another letter to the SEC seeking clarification on the regulatory framework for Special Purpose Broker Dealers and Ether's regulatory status, after Prometheum reportedly launched custody services for Ether.

House Passes FIT 21

Overview

On Wednesday, the House passed the Financial Innovation and Technology for the 21st Century Act ("FIT 21") with massive bipartisan support.


Who Supported & Why

Who?

208 Republicans and 71 Democrats voted yes. In other words, two-thirds of all Members voting voted in favor of passage.

Yes votes even included high ranking and influential Democrats, such as Speaker Emerita Nancy Pelosi, Democratic Whip Katherine Clark, and Democratic Caucus Chair Pete Aguilar.

Prior to the vote, eight Democrats, led by Rep. Wiley Nickel (D-NC), circulated a memo urging their Democratic colleagues to vote yes.

Why?

Members supporting FIT 21 argued the bill would:

  • Clarify jurisdictional lines for the SEC and CFTC

  • Close the existing regulatory gap in the spot market for digital commodities

  • Promote innovation by clarifying regulatory obligations for crypto intermediaries and entrepreneurs, including those looking to raise capital through digital asset sales

  • Address anti-money laundering concerns by clarifying that intermediaries are subject to the Bank Secrecy Act

  • Protect customers by:

    • Establishing rules for intermediaries, such as mitigating conflicts of interest, prohibiting commingling of funds, and holding sufficient capital, and

    • Modifying disclosure requirements so investors have access to information most material to digital assets.

Who Opposed & Why?

Who?

Three Republicans and 133 Democrats voted noted No. No votes included House Democrat Leader Hakeem Jeffries (D-NY), Ranking Members Maxine Waters (D-CA) and David Scott (D-GA).

The White House also opposed FIT 21, though it stopped short of a veto threat, instead issuing a statement opposing passage of H.R. 4763. The statement was notably warmer towards digital assets than last week's veto threat of the SAB 121 repeal resolution, reading in part:

"The Administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets, building on existing authorities, which will promote the responsible development of digital assets and payment innovation and help reinforce United States leadership in the global financial system."

SEC Chair Gensler also lobbied Members of Congress to vote against the bill, writing a missive of opposition on the morning of the vote.

Why?

Members opposing FIT 21 primarily argued that the bill would:

  • Undermine existing securities laws by granting crypto firms and crypto assets lighter touch rules than those that apply in traditional securities markets

  • Fail to sufficiently protect digital asset investors and customers of digital asset firms

  • Fail to sufficiently address illicit finance concerns.

What's Next?

The bill heads to the Senate, where it will likely stall for the foreseeable future for a few reasons. First, Senators have their own vision for crypto markets regulation (see, e.g., Lummis-Gillibrand's RFIA & Senate Ag Chair Stabenow and Ranking Member Boozman's DCCPA from last Congress), so it's unlikely they simply pick up the House bill and run with it.

Second, an election year on the Hill means: (a) political messaging votes are increasingly likely to take priority over substantive dealmaking, and (b) there's a shortened legislative calendar, as Congress spends less time in session and more time on the campaign trail.

Third, while industry strongly supported moving the bill through the House, many advocates concede the bill is far from perfect, and will likely push for amendments before pushing the bill farther along.

Still, the massively bipartisan vote in the House for FIT 21 is significant. It shows an almost 2/3 majority of Representatives in the House believe the status quo isn't working, marking the starkest rebuke yet of SEC Chair Gensler's position that the laws are already clear. This vote, combined with the recent bipartisan votes to repeal SAB 121 in the House and Senate, show the crypto community is making headway on Capitol Hill.

Further, considering this many Members supported a crypto bill as comprehensive as FIT 21, prospects for more targeted legislation like stablecoins and clarifying tax reporting requirements for digital asset brokers are looking up. With all that said, these last few weeks have shown how quickly political headwinds can change - and why predicting a bill's fate is often a futile exercise.

House Passes CBDC Ban

Overview

On Thursday, the House passed the CBDC Anti-Surveillance State Act, a bill to prohibit the Fed from issuing or even developing a U.S. CBDC.

More specifically, the CBDC Anti-Surveillance State Act would prohibit the Fed from:

  • issuing a CBDC directly or indirectly to an individual

  • offering services directly or indirectly to an individual

  • using a CBDC to implement monetary policy.

The House also agreed to three amendments to the bill. As a result, the bill would also prohibit the Fed from:

  • designing, building, developing, or establishing a CBDC (Rep. Davidson Amendment).

  • testing the practicability of issuing a CBDC, including by partnering or coordinating with the private sector, unless authorized by Congress (Rep. Mooney Amendment).

Rep. Ogles Amendment expresses the sense of Congress that the Fed should not be permitted to develop, create, or implement a CBDC or use it for monetary policy.

Who Supported & Why

213 Republicans and 3 Democrats (Reps. Golden (D-ME), Mary Peltola (D-AK), and Marie Perez (D-TX)) voted for the bill.

Supporters of the bill primarily argued:

  • CBDCs threaten individual financial privacy by giving the government a way to surveil and monitor citizens' financial transactions.

  • The Constitution vests Congress, not the Fed, with the power to coin money (See Article I, Section 8, Clause 5).

  • Any efficiencies offered by a CBDC (faster, cheaper, cross-border settlements) could be achieved by privately issued stablecoins.

Who Opposed & Why

192 Democrats voted against the bill. No Republicans voted against the bill.

Led by Rep. Maxine Waters (D-CA), opponents primarily argued that:

  • A ban on a U.S. CBDC could threaten $USD dominance, as numerous other countries are already moving forward with developing a CBDC.

  • Any privacy concerns could be mitigated through legislation limiting the Fed's surveillance capabilities.

  • The bill's definition of a "CBDC" is overly broad, such that it might undermine the Fed's ability to conduct monetary policy.

What's Next?

Given the near party-line vote, this is likely as far as this one goes. But the CBDC issue, particularly the privacy related concerns held by voters on the right, is likely to come up in political messaging on the campaign trail.

Look Ahead

  • Congress is out of town next week for Memorial Day recess.

    • House & Senate are slated to return on Monday, June 3.

  • President Biden has until June 3 to veto the SAB 121 repeal resolution.

Quick Hits

SEC

  • Late Thursday, the SEC took a critical step towards approving spot Ether ETPs, effectively recognizing Ether is not a security.

    • Specifically, the SEC approved 19b-4 applications for BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy, and Franklin Templeton to issue spot Ether ETPs. But before trading can begin, the SEC will still have to approve the issuers' S-1 filings, which include disclosures about key investment information, like risk factors, investment objective, and pricing information. (See, e.g., Ark 21 Shares Bitcoin ETF S-1 filing).

  • On Wednesday, Rep. French Hill (R-AR), Majority Whip Tom Emmer (R-MN), Rep. Josh Gottheimer (D-NJ), Rep. Mike Flood (R-NE), and Rep. Wiley Nickel (R-NC) sent a letter to SEC Chair Gensler effectively urging the SEC to approve pending Ether ETP applications.

  • Earlier in the week, Chair McHenry (R-NC), Bill Huizenga (R-MI), and French Hill (R-AR) sent a letter to SEC Chair Gensler seeking further clarification on the regulatory framework for Special Purpose Broker Dealers and ETH's regulatory status.

    • Specifically, the letter asks for documents and communications between the SEC and FINRA regarding: (1) the SPBD application process and SPBD allowable activities, (2) what digital asset securities are eligible for SBPD custody, and (3) the regulatory classification of ETH.

      • The Letter also states the SEC's previous response on the issue "failed to sufficiently describe how Prometheum will comply with its SPBD obligations with respect to ETH."

      • Full Letter.

      • See Chair McHenry's previous Letter (signed by HFS & House Ag Republicans); See also SEC Response Letter from April 9.

  • This week's letter follows reports that Prometheum is launching Ether custody services for institutional clients.

Senate Energy Hearing

  • At a Senate Energy and Natural Resources hearing, Senators discussed how to address the issue of increasing energy demand, with many highlighting growing demand to power data centers for AI. There was one specific mention of bitcoin mining in Senator Barrasso's (R-WY) opening statement:

    • "We cannot be open for business if we cannot keep the lights on. The biggest source of new electricity demand is expected to come from data centers. Data centers enable cloud computing, bitcoin mining, and artificial intelligence. How we meet this growing demand for electricity will have serious economic and security consequences for our nation."

    • See Video Clip Here (H/T @DigitalEnergyCouncil).

Litigation Updates

  • The Blockchain Association and the Crypto Freedom Alliance of Texas filed a motion for summary judgement in their case seeking to vacate the SEC's dealer rule.

    • Filing.

    • Here's a helpful thread from the BA's Head of Legal, Marisa Coppel, breaking down the motion's key arguments:

  • Uniswap Labs responded to the SEC's Wells notice:

    • Blog.

    • Wells submission.

Trivia

Last Week's A: The first Congresswoman to announce she was expecting during her Congressional term was Yvonne Brathwaite Burke in 1973.

This Week's Q: Who is the only Senator to lose his life in a military engagement while serving in the U.S. Senate?

Thank you for reading and enjoy your Memorial Day weekend.

-GSL

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learn more more about Cap Hill Crypto's advisory services.

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