Gary Gensler Criticizes FIT21 Act Ahead of Crucial House Vote

US Securities and Exchange Commission (SEC) Chair Gary Gensler has publicly criticized the Financial Innovation and Technology for the 21st Century Act (FIT21). 

In a statement released on Wednesday, Gensler expressed his concerns that the proposed legislation would undermine investor protection and create regulatory gaps. The FIT21 Act aims to adjust the regulatory framework for blockchain and crypto assets, which Gensler believes could pose risks to capital markets and investor safety.

Gensler’s primary argument is that the act, designated H.R. 4763, challenges the classification of crypto assets as investment contracts. By doing so, it would remove them from SEC oversight, potentially exposing investors to unregulated risks. He emphasized that the self-certification processes proposed in the bill could enable crypto firms to evade scrutiny by labeling their products as decentralized or as digital commodities.

Potential Risks to Investor Protection

Gensler warned that FIT21 could allow crypto firms to self-certify their crypto investments and products, avoiding SEC regulation. He expressed concern that the agency would need more resources to challenge these self-certifications due to resource constraints. This, he argued, could leave a significant portion of the crypto market unregulated, increasing the potential for fraud and investor harm.

Gensler stated, 

“The self-certification [process] risks investor protection not just in the crypto space; it could undermine the broader $100 trillion capital markets by providing a path for those trying to escape robust disclosures, prohibitions preventing the loss and theft of customer funds, enforcement by the SEC, and private rights of action for investors in the federal courts.” 

He also raised concerns about potential abuses, such as pump and dump schemes and penny stock fraud, if perpetrators were able to bypass securities laws by categorizing their products as crypto investment contracts or decentralized systems.

Impact on Regulatory Frameworks

The SEC chair also pointed out that the bill would exclude crypto trading platforms from the definition of an exchange and eliminate established frameworks like the Howey test. This test has historically been used to determine whether a transaction qualifies as an investment contract. Gensler argued that removing these frameworks would significantly weaken investor protection mechanisms.

Gensler emphasized that the existing regulatory issues within the crypto industry stem not from unclear rules but from non-compliance by many industry players. He asserted that the crypto industry’s record of failures, frauds, and bankruptcies is due to a lack of adherence to existing regulations rather than a need for new ones.

Support for the Bill from the Crypto Industry and Politicians

Despite Gensler’s objections, the FIT21 Act has garnered support from several major crypto organizations and political figures. Last week, 60 crypto firms, including Gemini, Kraken, Coinbase, and the Digital Currency Group, signed a letter endorsing the bill. They argued that current securities laws, which are nearly a century old, need to be more suited to address the unique characteristics of digital assets.

Additionally, former U.S. President Donald Trump and his advisors have expressed support for the bill. Trump has even announced plans to accept campaign donations in cryptocurrency. This political backing underscores the bill’s perceived importance among its proponents as a necessary update to outdated regulatory frameworks.
According to The American Prospect report on Tuesday, House Speaker Nancy Pelosi (D-CA) is also considering bringing the bill to a vote. This highlights the bipartisan interest in addressing the regulatory status of cryptocurrencies and the broader digital asset ecosystem.