Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), has expressed strong opposition to the Financial Innovation and Technology Act of the 21st Century (FIT21 Act), which is set to be voted on in the House of Representatives.
Gensler’s Concerns About Regulatory Loopholes
One of Gensler’s main concerns is the potential regulatory loopholes that the FIT21 Act may create. He believes that the H.R. 4763 bill could weaken long-standing principles of investment contract regulation, posing significant risks to investors and the capital market. Gensler stated, “FIT21 would create new regulatory loopholes, undermine decades of precedents on the regulation of investment contracts, and put investors and the capital market at immeasurable risk.”
Threats Posed by Cryptocurrencies
Another major worry for Gensler is that the FIT21 Act attempts to reclassify cryptocurrencies and remove them from the SEC’s jurisdiction. This reclassification could hinder the SEC’s ability to protect investors. Gensler is concerned that crypto companies may self-certify their products as “decentralized” digital commodities, thereby bypassing the SEC’s rigorous scrutiny.
Gensler warned that the self-certification process proposed by the bill could lead to significant market vulnerabilities. He emphasized, “Self-certification not only puts investors at risk, but also has the potential to undermine the entire $100 trillion capital market, providing a pathway for those trying to evade full disclosure, prevent customer funds from being lost or stolen, evade SEC enforcement, and avoid private lawsuits in federal courts by investors.”
Abuse of the FIT21 Act to Evade Securities Laws
Gensler expressed concerns about potential abuses of these regulatory loopholes by bad actors. He presented a hypothetical scenario in which “pump and dump” schemes and promoters of high-risk stocks could evade securities laws by considering themselves as crypto investment contracts or self-certifying as decentralized systems.
Another key point raised by Gensler is that the FIT21 Act excludes cryptocurrency trading platforms from the definition of exchanges. This exclusion, coupled with the elimination of the well-established Howey test, would severely limit investor protections.
FIT21 Act Pushed by the Republican Party
The FIT21 Act is being promoted by the U.S. Republican Party with the aim of comprehensive regulation of a broader crypto ecosystem and granting more responsibilities to the Commodity Futures Trading Commission. Last week, 60 crypto organizations, including Gemini, Kraken, Coinbase, and Digital Currency Group, supported the bill, stating that current securities laws are outdated for modern digital asset companies.
The bill has received support from key political figures, including former U.S. President Donald Trump, who is willing to accept campaign donations in cryptocurrency. House Speaker Nancy Pelosi is also considering voting on the bill. The U.S. House of Representatives is expected to vote on FIT21 later this week.
In his concluding remarks, Gensler emphasized the poor conduct of the crypto industry in complying with regulations. He stated, “The failures, frauds, and bankruptcies in the crypto industry are not because we don’t have rules or the rules aren’t clear; it’s because many participants in the crypto industry don’t comply with the rules.”
FIT21 Act
Gary Gensler
SEC