US House passes market structure bill to regulate the crypto industry

The U.S. House of Representatives passed a crypto market structure bill that aims to regulate the industry at large, marking the first time comprehensive crypto legislation has been voted on in the full House.

The House voted 279 to 136 on Wednesday to pass the Republican-led Financial Innovation and Technology for the 21st Century Act, also known as FIT21. Seventy-one Democrats voted in support of the bill, including former Speaker of the House Rep. Nancy Pelosi of California. 

“FIT21 is a first step to establish a regulatory framework for digital assets – and it must be improved by working with the Senate and the Administration," Pelosi said in a statement after the vote. "While building a foundation for responsible innovation, we must take further action to strengthen guardrails for consumers, investors and taxpayers."

FIT21 would grant more power and funding to the Commodity Futures Trading Commission to oversee crypto spot markets and "digital commodities," particularly bitcoin. The bill also creates a process to allow for the secondary market trading of digital commodities if they were "initially offered as part of an investment contract." Stablecoins and anti-money laundering provisions are also in the bill. Though FIT21 is unlikely to be brought up in the Senate this year, the bill could set the stage for the next Congress in January. 

House Financial Services Chair Patrick McHenry, who is set to retire at the end of his term in January 2025, told reporters during a briefing on Tuesday that he would "drive like hell to get whatever we can out of this Congress," citing bipartisan support.  

"My time as chair and my time in Congress is coming to an end, but the policy is not coming to an end," McHenry said. 

Ron Hammond, director of government relations at the Blockchain Association, said Congress's view of crypto is changing.

"In the past 48 hours, we've seen crypto grassroots and political forces result in a seismic shift in opinion of the industry here in DC," Hammond said in a statement to The Block. "This view of the industry seems to not only be shifting opinions of the industry in Congress ahead of the FIT21 vote, but potentially rolling back the regulatory barriers the SEC Chair has tried to build his legacy around." 

FIT21 is "a massive turning point," Hammond added.

"The link between crypto voters and the upcoming election is undeniable though and it seems the Biden Administration is starting to finally wake up to the potential consequences of continuing with the status quo," Hammond said.

The vote on FIT21 comes after the Senate and House passed a measure withdrawing a Securities and Exchange staff accounting bulletin, which establishes certain accounting standards for firms that custody crypto. The resolution drew some Democratic support, including from Senate Majority Leader Chuck Schumer, D-N.Y. However, the White House has said President Joe Biden would veto it. On Wednesday, the White House said it opposes FIT21 but is "eager to work with Congress" on a regulatory framework for digital assets. 

Criticism of the bill 

House Financial Services Committee Ranking Democrat Maxine Waters told the House Rules Committee on Tuesday that FIT21 was one of the worst bills she's ever seen. 

FIT21 would stretch the CFTC's resources, weakening the agency's enforcement of the industry, Waters said. The SEC has 4,500 staff members, according to its website, while the CFTC has only around 700 employees, according to a fiscal year 2024 budget document.

"Let me let you on a secret that the big crypto doesn't want you to know even under this bill," Waters said. "The CFTC does not get enough authority to regulate crypto in this bill." 

SEC Chair Gary Gensler has also criticized FIT21 and said it would create new gaps in regulation and throw away the Howey Test, a 1946 U.S. Supreme Court case frequently cited by the SEC in cases involving crypto, to determine whether an asset qualifies as an investment contract and, therefore, a security. 

"The crypto industry’s record of failures, frauds, and bankruptcies is not because we don't have rules or because the rules are unclear. It’s because many players in the crypto industry don’t play by the rules," Gensler said in his speech Wednesday. "We should make the policy choice to protect the investing public over facilitating business models of non-compliant firms."

What's next?

There is not a companion bill for FIT21 in the Senate, and top lawmakers in the Democrat-controlled Senate have not shown interest in the bill or have opposed it in the past. 

Investment bank TD Cowen said earlier this month the bill stood "no chance of becoming law in this Congress" but noted it could shed light on how Democrats and Republicans view critical issues such as anti-money laundering and investor protections.

Sens. Kirsten Gillibrand, D-N.Y., and Cynthia Lummis, R-Wyo., released a comprehensive bill to regulate crypto in June 2022 called the Responsible Financial Innovation Act, but that's not a companion bill to FIT 21 and has yet to gain an appetite on the Hill. 

Meanwhile, lawmakers have forged ahead on stablecoin legislation in the House and Senate led by Gillibrand, Lummis, McHenry and Waters. In the House, there has been disagreement on who should be the primary regulator of stablecoins and talks have been in a holding pattern. 

"Mr. McHenry and I worked for two years to put together a stablecoin bill and I think we could have gotten one, but for some resistance, I understand, from the opposite side of the aisle," Waters said during the House Rules committee hearing on Tuesday. "I think we should have pursued that. I think we could have gotten to it, but instead here we come up with market structure, which is so different." 

Updated on May 22 at 10:10 p.m. UTC to include details about Pelosi