On May 22, a groundbreaking law aimed at clarifying crypto industry regulations in the United States was passed. The H.R. 4763 (Financial Innovation and Technology for the 21st Century Act, FIT21) bill marks a significant step toward enabling blockchain projects to launch safely and effectively within the U.S.

H.R. 4763 delineates the regulatory boundaries between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), establishing a foundation for determining whether digital assets are securities or commodities. Notably, the bill’s primary focus is on the degree of decentralization of digital assets to define their regulatory oversight.

The bill stipulates that digital assets operating on a functional and decentralized blockchain network are classified under the CFTC’s jurisdiction as commodities. Conversely, if the blockchain network is functional but not decentralized, the assets are classified as securities under the SEC’s oversight.

# Decentralization Defined: Control and Interest

A critical aspect of the bill is its definition of decentralization. Under the new regulations, a blockchain network is considered decentralized if no single entity has control, and neither the issuer nor related parties hold more than 20% of the digital assets’ control or voting rights.

Many Layer 1 networks launched post-Ethereum often see issuers and affiliates holding more than 20% control, making them likely to be classified as securities under this bill. This stipulation could prompt projects to find new methods to distribute their digital assets to comply with the decentralization criteria. However, the definition remains incomplete and could lead to interpretative challenges if the scope of “issuer” and “affiliated parties” is not clearly defined.

Additionally, while the bill uses the degree of a network’s decentralization as the primary factor in determining the classification of digital assets, this singular approach could be inadequate given the diverse utility tokens’ functions in decentralized applications (dApps).

Nonetheless, the bill’s attempt to lay the groundwork for defining decentralization marks an initial step towards regulatory clarity.

# Establishing a Launch Pad for U.S. Projects and Enhancing Consumer Protection

Beyond regulatory clarity, the bill seeks to reinforce oversight of crypto exchanges and bolster consumer protection rules in the United States. Key consumer protection provisions include segregation of customer funds, lock-up periods, and annual sales limits for insider tokens, and enhanced disclosure requirements.

Introducing clear regulations could attract more capital and talent, fostering innovation that has been stifled by the previous fragmented and unclear regulatory framework. This ambiguity has often hampered responsible entrepreneurs and startups, leading to significant technological setbacks. The exclusion of the U.S. market by many blockchain projects for activities like airdrops and token sales is a testament to this issue.

The H.R. 4763 Act aims to create a regulatory environment conducive to blockchain technology’s growth, protect U.S. markets and consumers, and clarify SEC and CFTC jurisdiction.

However, the bill is not without criticism. Concerns include the high threshold set for decentralization, potentially expanding the SEC’s jurisdiction excessively, and the still-ambiguous definitions that could leave room for varied interpretations.

Before the bill’s passage, SEC Chairman Gary Gensler and the Biden administration publicly opposed it. Despite this opposition, the bill passed the House, and while the administration has voiced objections, there has been no mention of a veto.

Should H.R. 4763 become law, it could mark a crucial turning point, providing a more conducive environment for blockchain technology and the crypto industry to flourish in the United States. The current uncertain regulatory climate has hindered innovation and deterred numerous projects from engaging with the U.S. market. A clear regulatory framework could unleash blockchain technology’s potential, ultimately promoting market growth.