Gary Gensler Criticizes FIT 21 Act, Citing Risks to Investors and Markets

• SEC Chair Gary Gensler criticized the FIT 21 Act, stating it creates regulatory gaps and undermines investor protections by allowing crypto issuers to self-certify as decentralized, evading SEC oversight.
• Gensler warned that the FIT 21 Act could jeopardize the $100 trillion capital markets by enabling entities to bypass securities laws through self-certification.

U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler released a statement today where he publicly expressed his dissent against the Financial Innovation and Technology for the 21st Century Act (“FIT 21”).

“FIT21 would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk,” wrote Gensler.

According to Gensler, the proposed bill aims to significantly alter the regulatory landscape for crypto assets by removing blockchain-recorded investment contracts from the statutory definition of securities, thereby stripping them of federal protections. 

It allows issuers to self-certify their products as “decentralized” and classify them as “digital commodities,” evading SEC oversight unless the SEC challenges within 60 days—a task impractical given resource constraints. 

The bill replaces the Supreme Court’s Howey test, which evaluates the economic realities of investments, with a focus on labels and record-keeping methods, weakening investor protections. Additionally, it offers fewer protections for crypto contracts still under SEC jurisdiction, increases risks for investors by excluding crypto trading platforms from the definition of exchanges, and permits conflicts of interest. 

The bill also exempts a broad range of Decentralized Finance entities from regulation, regardless of potential conflicts. Furthermore, it relaxes offering restrictions by allowing non-accredited investors to purchase significant amounts of crypto assets without requiring issuer disclosure, posing substantial risks to ordinary investors.

Gensler in his statement also warned that the bill's self-certification process endangers not only crypto investors but also the broader $100 trillion capital markets. It could allow entities to evade robust disclosures, SEC enforcement, and investor protections by simply labeling themselves as crypto investment contracts or decentralized systems. 

This might enable perpetrators of pump-and-dump schemes and penny stock frauds to claim exemption from securities laws, with the SEC having just 60 days to contest their self-certification.

Edited by Harshajit Sarmah