By Cameron Dale

INTRODUCTION

Capital markets have witnessed the emergence of a new asset class—digital assets—driven by financial innovation. These assets, including cryptocurrencies, crypto-assets, and digital tokens, represent monetary value in digital form. Certain digital assets are subject to securities regulations based on its economic substance despite the variety of terms used to describe them.[1] However, whether a digital asset constitutes an “investment contract,” which requires registration and adherence to stringent securities regulations has been unclear since their inception. 

The recent holding in SEC v. Ripple Labs Inc. (2023) clarified that primary market transaction of digital assets to institutional buyers, such as Initial Coin Offerings (ICO), constituted an “investment contract.”[2] Simultaneously, Ripple also clarified that secondary market transactions involving the same digital assets in not inherently constitute an “investment contract” even though its ICO did.[3] In effect, Ripple drew a line between primary market transactions, which may involve securities, and secondary market activity, which resembles commodity trading. This distinction has spurred downstream executive orders and legislative proposals aimed at codifying the divide. This article challenges the view that such a division is legally meaningful.

This article examines the Financial Innovation and Technology for the 21st Century Act (FIT21), focusing on how it delineates between primary market cryptocurrency offerings by issuers and secondary market transactions by market participants. It argues that FIT21 is both unnecessary and unwise. First, existing statutory tools are sufficient to manage digital asset concerns. Second, FIT21’s rigid, per se rules create openings for regulatory arbitrage, which sophisticated financial fraudsters could exploit to their advantage.

I.              Demystifying Digital-Assets

A.    Cryptocurrency, Blockchains, and ICOs

Cryptocurrency is a broad term encompassing digital or virtual currencies that rely on cryptography for security.[4] Within this broad category, there are many types of cryptocurrencies, each with unique characteristics. The classification is important because understanding these distinctions is key to considering how to regulate their initial sale and secondary market exchanges.

• Coins serve as digital currency alternatives to fiat currencies.[5] Bitcoin is the most prominent example.[6]
• Security tokens function similar to stocks in publicly traded companies. Security tokens are often tied to equity, profit-sharing, or dividends derived from a blockchain-based enterprise.[7]
• Utility tokens typically function like prepayments for future access to blockchain-based products or services.[8] Similar to buying discounted arcade tokens before the arcade is even open—the buyer may either play pinball or liquidate their tokens at market price upon opening.

Digital assets have been promoted for various benefits, technological innovation, and enhanced security. At the same time, digital assets also present considerable risks—not limited to the frequent and volatile value fluctuations common in many financial products.[9] Some have argued that the rapid emergence of cryptocurrencies and the absence of comprehensive regulatory regime have created an environment conducive to misconduct by bad actors.[10]

Blockchain technology serves as the foundational infrastructure for cryptocurrencies.[11] It is a decentralized and distributed ledger that records transactions across multiple nodes, ensuring transparency, security, and resistance to tampering.[12] Unlike traditional centralized databases managed by a single intermediary, blockchain operates as an open and immutable ledger, with each transaction cryptographically secured, permanently recorded, and visible to all those who are using and participating on the blockchain.

The decentralized nature of the blockchain enhances its reliability and security.[13] Each transaction is grouped into a “block” and appended sequentially to the blockchain, with alterations requiring consensus from the network.[14] While blockchain technology holds substantial promise, it also raises pressing regulatory concerns. Advocates of minimal oversight argue that decentralization inherently limits the need for government intervention. In contrast, critics contend that well-defined legal frameworks are essential to build public trust and ensure the responsible development of blockchain-based financial instruments.

An ICO is a fundraising mechanism used by blockchain-based companies to raise capital through the distribution of digital assets.[15] Investors exchange cryptocurrencies such as Bitcoin for digital assets, which may confer various rights, including access to future products (utility tokens), equity interests (security tokens), or serve as digital currencies (coins).[16] ICOs appeal to entrepreneurs for their accessibility and efficiency, enabling startups to secure funding without traditional venture capital or financial institutions.[17]

An ICO is comparable to an Initial Public Offerings (IPO). However, ICOs typically involve the sale of digital tokens to raise funds for blockchain-based projects, often without granting equity or ownership rights, whereas IPOs involve the sale of securities that confer ownership stakes in a company.[18] Unlike IPOs, which are subject to rigorous oversight by the U.S. Securities and Exchange Commission (SEC), ICOs have largely operated in a legal “no man’s land,” leading to questions about which regulatory regime is controlling.[19]

B.    Successful and Unsuccessful ICOs

The first ICO in history was MasterCoin, which launched in 2013 by J.R. Willet.[20] Through their token sale, MasterCoin successfully raised $500,000 worth of Bitcoin.[21]

The largest market capitalization ICO in 2024 was IntelMarkets, an AI-powered altcoin project that raised over $770,000 within the first 36 hours of its launch.[22] IntelMarkets introduced a dual-chain architecture leveraging Ethereum and Solana, paired with an AI-driven trading protocol offering leverage of up to 1,000x.[23] By the end of the ICO, IntelMarkets had raised over $2.4 million.[24] IntelMarkets has neither filed a mandatory registration statement nor any other disclosures with the SEC.[25] 

In stark contrast, the $HAWK token, launched in December 2024 by YouTube personality Haliey Welch[26], serves as a cautionary tale of ICO volatility.[27] The coin initially experienced a meteoric rise, reaching a market capitalization of $490 million shortly after its release.[28] However, this success was short-lived, as the token’s value plummeted by over 90% within hours, resulting in significant financial losses for initial investors.[29] The $HAWK token failure was widely attributed to a “pump-and-dump”[30] scheme, which prompted a complaint to be filed against the entities involved in promoting and selling the coin.[31] The plaintiffs allege that the defendants engaged in the unlawful promotion and sale of an unregistered security token, fraud, and insider trading.[32]

II.            Securities Regulation Interface with ICOs  

 

A.    The Significance of Securities Regulations

Before turning to the legal complexities, it is important to understand what is at stake when a digital asset is labeled a “security.” One might wonder why blockchain developers don’t simply register their coins or tokens with the SEC. While well-capitalized firms can more easily navigate the SEC’s registration process, early-stage blockchain startups often struggle to meet the legal demands of disclosure compliance.

First, registering a security is both costly and complex. Under § 5 of the Securities Act, companies cannot offer or sell securities without an approved registration statement.[33] This statement requires extensive financial disclosures, including two years of audited financial statements for emerging growth companies,[34] outstanding debt, share count, and market capitalization.[35]

And second, legal liability poses another challenge. Under § 11 of the Securities Act, anyone involved in preparing a registration statement is strictly liable for material misstatements.[36] While statements made in good faith by non-experts have some degree of protection, blockchain projects typically necessitate expert opinions, thereby heightening their liability exposure. Moreover, Rule 10b-5 of the Exchange Act prohibits fraudulent acts in securities transactions and is a favored tool in securities class actions.[37] The Supreme Court, in Blue Chip Stamps v. Manor Drug Stores, acknowledged that even weak securities lawsuits hold substantial settlement value, as their mere existence can disrupt a company’s operations.[38] Given the volatility of blockchain markets, failed ICOs would be prime targets for such litigation.

B.    The Howey Test: What Is a “Security”?

The Securities Act broadly defines “security” to include various financial instruments, including “investment contract[s],”[39] which serve as “a catchall phrase”[40] to cover unique financial instruments that are not easily categorized. However, the Securities Act itself neither defines “investment contract,” nor does its legislative history provide significant clarity on its meaning.

In SEC v. W.J. Howey Co, the Supreme Court established a three-part test to determine whether a transaction constitutes an “investment contract” under the Securities Act.[41] According to the Court, a transaction or scheme constitutes an “investment contract” if it involves: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit derived from the efforts of others.[42]

The Supreme Court clarified that the Howey test “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”[43] The Howey test evaluates the “economic realities underlying a transaction”[44] rather than the name or form of the arrangement. Due to its breadth and adaptability, applying the Howey test often involves detailed, fact-specific analyses of each transaction. Courts have applied it to diverse financial arrangements, including pyramid schemes,[45] ice machine leases,[46] earthworm farms,[47] and chinchilla ranches,[48] all of which constituted an “investment contracts.”

The central issue for an ICO is whether the cryptocurrencies being sold during a ICO satisfies the three elements of the Howey test, thus constituting an “investment contract.” However, it is impossible to generalize how the Howey test applies to all ICOs because ICOs are highly diverse. Determining whether an ICO involves an offering of a “security” requires a detailed fact-specific examination into the transaction’s features and economic substance.

C.    SEC v. Ripple Labs, Inc.

In 2012, the founding of Ripple Labs coincided with the launched of XRP Ledger, a blockchain designed to facilitate fast, low-cost, and energy-efficient transactions.[49] The ledger’s source code generated a fixed supply of 100 billion XRP, with 20 billion retained by the founders and 80 billion allocated to Ripple.[50] Ripple aimed to modernize cross-border payments through its blockchain-based financial products, which utilized XRP to facilitate fiat currency exchanges.[51]

From2013 to 2020, Ripple distributed XPR through two primary channels. First, the “Institutional Sale” involved Ripple’s direct sale of XRP to institutional investors, raising approximately$728 million.[52] Second, the “Programmatic Sales” involvedblind transactions of XRP on public secondary markets, generating$757 million.[53] Ripple never filed a registration statement for any offering or sale of XRP.[54]

In 2020, SEC filed suit against Ripple Labs alleging that both the Institutional Sale and the Programmatic Sale constituted an offering and sale of unregistered securities.[55] The New York Southern District Court held that Ripple’s Institutional Sales of XRP constituted a violation of securities regulation, and the Programmatic Sales did not.[56]

1.     Institutional Sales

The Institutional Sale involved selling XRP to sophisticated and institutionalized investors pursuant to written contracts (Institutional Buyers).[57] The court held that the Institutional Sale constituted an “investment contract” because all three elements of the Howey Test were satisfied.[58]

First, the “investment of money” element was satisfied because the Institutional Buyers provided “fiat or other currency in exchange for XRP.”[59] Second, the “common enterprise” element was satisfied on the grounds of “horizontal commonality,” which involves investors’ funds being pooled together, and their fortunes depend on the success of the enterprise.[60] The undisputed record showed that Ripple had pooled proceeds from its Institutional Sales into multiple bank accounts and controlled all these accounts and used the funds to finance its operations.[61]

And third, the “expectation of profit derived from the efforts of others” element was satisfied. During the course of the Institutional Sale, Ripple marketed XRP as an investment opportunity, emphasizing that XRP’s value was dependent on Ripple’s continued development of its ecosystem.[62] Ripple’s “Deep Dive for Financial Professionals” brochure provided: “Ripple’s business model is predicated on a belief that demand for XRP will increase . . . if the Ripple protocol becomes widely adopted.”[63] Moreover, Ripple’s quarterly XRP Market Reports repeatedly tied XRP’s price movement to Ripple’s own efforts and business success.[64] Given this extensive marketing campaign and Ripple’s direct promotion of XRP as an investment, the court found that the nature of the Institutional Sale supports the conclusions that “Ripple sold XRP as an investment rather than for consumptive use.”[65] Therefore, a reasonable Institutional Buyers would have expected to profits from Ripple’s efforts.[66] Based on the economic realities and totality of circumstances, the court held that Ripple’s Institutional Sales of XRP constituted an “investment contract” and thus was a violation of securities regulations.[67]

2.     Programmatic Sales

Ripple’s Programmatic Sales consisted of blind bid/ask transactions on digital asset exchanges, where buyers did not know who they were purchasing XRP from Ripple, and Ripple did not know the identities of the buyers (Programmatic Buyers).[68] Unlike Institutional Sales, the Programmatic Sales were conducted through open market transactions rather than contractual agreements with a particular group of investor.[69] Only the third element was at issue. The court held that “expectation of profit derived from the efforts of others” element was not satisfied.[70]

While it is possible that some Programmatic Buyers purchased XRP with the hope of profiting from Ripple’s efforts, the relevant inquiry is an objective one.[71] “Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, Programmatic Buyers could not reasonably expect the same.”[72] Ripple’s Programmatic Sales took place through blind bid/ask transactions, meaning Programmatic Buyers had no way of knowing whether their payments were going to Ripple or to another XRP seller. The Programmatic Sales accounted for less than 1% of the global XRP trading volume. As a result, the vast majority of XRP purchasers did not invest in Ripple itself. In fact, many Programmatic Buyers were entirely unaware of Ripple’s existence.[73] From an economic standpoint, a Programmatic Buyer was no different than any other secondary market participant—unaware of the identity of the seller or where their money was going.[74]

Moreover, Programmatic Buyers had no direct communication with Ripple.[75] Programmatic Buyers never received marketing materials and contractual agreements linking XRP’s value to Ripple’s business.[76] The record contains no evidence that a reasonable Programmatic Buyer—who was generally less sophisticated than Institutional Buyer—shared the same “understandings and expectations” as those purchasing directly from Ripple.[77] Therefore, Programmatic Buyers did not have the same basis as Institutional Buyers to reasonably expect that Ripple would use its capital contributions to generate profits on behalf of the Programmatic Buyers.[78] Accordingly, the court ruled that Ripple’s Programmatic Sales of XRP did not constitute “investment contracts.”[79] As such, Programmatic Sales did not violate securities regulations.[80]

D.   What Ripple’s Attorneys Failed to Litigate

Ripple’s legal team missed an opportunity to argue that its Institutional Sales could qualify as a § 4(a)(2) exemption, which exempts “transactions by an issuer not involving any public offering.”[81] This exemption is commonly implemented through Regulation D, which allows unlimited capital raising as long as (1) a Form D[82] is filed, (2) the offerees are “accredited investors,” and (3) no general solicitation occurs.[83] Moreover, under Rule 506(b), if an issuer is selling only to accredited investors, no disclosure filings are required.[84] By failing to assert the § 4(a)(2) exemption, Ripple left unchallenged the presumption that a capital raise through an ICO limited to institutional investors constitutes a non-exempt offering of securities. However, such a presumption is inconsistent with the legal framework governing private placements.

In Ripple, there is a compelling argument that the substance of the Institutional Sales structure was analogous to traditional private placements. The Institutional Sales were made through individualized, written contracts with sophisticated institutional buyers—each of whom likely met the definition of an “accredited investor.”[85] While the court did not disclose the specific identities of these Institutional Buyers, it stipulated that the counterparties included “primarily institutional buyers, hedge funds, and [On-Demand Liquidity] ODL customers.”[86] Ripple’s ODL customers were primarily financial institutions, payment service providers, and corporations engaged in cross-border payments.[87]

Additionally, it is arguable that no general solicitation occurred in connection with the Institutional Sales. Although Institutional Buyers received extensive marketing materials describing XRP as an investment opportunity, the court distinguished Programmatic Buyers on the grounds that they never received such targeted solicitations.[88] As Programmatic Buyers effectively represent the general public, while Institutional Buyers likely fall within the category of “accredited investors,” it follows that Ripple’s marketing efforts were directed toward a sophisticated, limited audience. Therefore, the Institutional Sale did not appear to constitute a general solicitation under securities laws.

Furthermore, the court stipulated that Ripple never filed any forms with the SEC. Ripple never filed a Form D, which would have activated the private placement exemption. Thus, the failure of litigating the § 4(a)(2) exemption is the fault of the litigators, but rather the fault of the transactions attorneys who never filed the simple Form D after Ripple’s Institutional Sale.

Assuming that Form D was timely filed, the § 4(a)(2) exemption should apply because the sales appear to involve only accredited investors, and no general solicitation occurred. As such, Ripple could have asserted a viable defense against claims alleging securities violations in connection with the Institutional Sales. Specifically, although the court found that Ripple’s Institutional Sales of XRP constituted the sale of an “investment contract,” liability for the unregistered sale and offering would not attach if the sales qualified for exemption under § 4(a)(2). This exemption shields issuers from registration requirements when securities are offered in a non-public manner to sophisticated investors—structurally similar to the Institutional Sales at issue in Ripple. However, Ripple’s transactional counsel failed to file a Form D, and its litigation team neglected to raise the § 4(a)(2) private placement exemption. Despite this lack of oversight, the Institutional Sales arguably qualified as “private offerings,” as the Institutional Buyers had access to extensive market materials that provided the type of information typically disclosed through SEC registration.

III.          Executive Orders & Pending Legislation: FIT21

On March 9, 2022, the Biden Administration issued Executive Order 14067, titled “Ensuring Responsible Development of Digital Assets.”[89] EO 14067 pertained to policy-guiding materials, which called for a highly centralized and an agency-driven enforcement framework of digital assets.

On May 22, 2024, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT21) with bipartisan support, by a vote of 279-136.[90] FIT21 emerged in response to a growing concern for a digital asset regulatory framework. FIT21 codifies Ripple’s two sale distinction by allocating jurisdiction between the Commodity Futures Trading Commission (CFTC) and SEC.[91]

While FIT21 would exempt certain digital assets from securities registration, it would also require registration by digital asset issuers, exchanges, and broker-dealers with either the SEC or CFTC under new categories and impose tailored disclosure obligations.[92] Although FIT21 faces long odds in the Senate, the support of 71 Democrats makes it the first major crypto-related bill to clear both houses. The growing bipartisan recognition, perhaps, indicates the need for a coherent digital asset regulatory framework. However, moments after FIT21 was passed, the Biden Administration issued a Statement of Administration Policy criticizing the bill for lacking adequate investor protections.[93] Moreover, SEC Chair Gary Gensler warned that is legislation would put capital markets “at immeasurable risk” due to regulatory gaps.[94] This article agrees with Gensler’s observation.

Before FIT21 can become law, it must pass the Senate and receive the President’s signature. As of this article, the bill has been received by the Senate, read, and referred to the Senate Banking Committee—but no vote has been scheduled.

On January 23, 2025, the Trump Administration issued Executive Order 14178, “Strengthening American Leadership in Digital Financial Technology,”[95]  which revoked Executive Order 14067, criticizing it as a form of “regulation by enforcement.”[96] EO 14178 promotes the “responsible growth and use of digital assets” and seeks to ensure fair, open access to information.[97]

President Trump has publicly expressed a desire to make the United States the “crypto capital of the planet.”[98] Pursuant to EO 14178, a report must be submitted to the President by July 22, 2025—180 days after issuance—recommending regulatory and legislative proposals consistent with the policies outlined in the Order.

A.    FIT21 Explained

Under FIT21, whether a digital asset falls under the jurisdiction of the CFTC or the SEC depends on a decentralization analysis involving four key factors: (1) who holds the asset, (2) the extent of control over the blockchain system, (3) the functionality of the asset within that system, and (4) how the asset was distributed to its holders.[99] If the blockchain is deemed both functional and decentralized, the asset is regulated as a digital commodity by the CFTC.[100] If the blockchain is non-functional or centralized, the asset is treated as a “restricted digital asset” under the SEC’s jurisdiction.[101]

Applying these rules to Ripple, at the time of Institutional Sales, Ripple retained centralized control, held billions of XRP, and heavily promoted XRP’s value based on Ripple’s business growth. Thus, under FIT21, XRP would likely be treated as a restricted digital asset,regulated by the SEC—similar to the Howey outcome. For the Programmatic Sales, although buyers may not have known they were purchasing XPR from Ripple, the asset itself would still be subject to SEC oversightif the underlying blockchain was not decentralized.

Unlike under Howey, where expectation of profit and issuer efforts are central, FIT21 focuses more on technical features of the blockchain and the structure of the asset itself. This could allow XRP to escape perpetual “security” status—provided Ripple can demonstrate that the blockchain system is no longer reliant on centralized management.

Summary Table 1:

Type of Sale	Howey Test Outcome	FIT21 Outcome
Institutional Sales	Subject to the SEC	Likely subject to the SEC
Programmatic Sales	Not subject to the SEC	Still subject to the SEC

 

B.    Exemptions Under FIT21

Under FIT21, digital assets sold pursuant to investment contracts may be exempt from SEC registration if they meet the criteria for “investment contract assets.” An investment contract asset must be: (1) fungible; (2) transferable peer-to-peer without reliance on intermediaries; (3) recorded on a cryptographically secured public distributed ledger; (4) sold or intended to be sold under an investment contract; and (5) not otherwise a security. FIT21 allows these assets to avoid securities classification despite being initially deemed an investment contract.

Applying this to Ripple, XRP likely satisfies the definition of an investment contract asset under FIT21. XPR was fungible, transferable peer-to-peer, and recorded on a public, cryptographically secured distributed ledger. Institutional Sales’ XRP was sold pursuant to investment contracts. At the time of those sales, however, XRP may still have been considered a security due to Ripple’s centralized control over the XRP Ledger and heavy promotional efforts linking Ripple’s success to the value of XRP. Despite this, the asset itself might still qualify as an investment contract asset under FIT21’s definition—meaning that, if Ripple had complied with the associated conditions, XRP could have been excluded from the statutory definition of a security.

Alternatively, FIT21 offers a transactional exemption from SEC registration if five conditions are met: (1) the offering raises no more than $75 million; (2) non-accredited investors invest no more than 10% of their income or net worth; (3) no investor owns more than 10% of the total units; (4) the asset qualifies as an investment contract asset; and (5) the issuer is U.S.-based and not otherwise restricted. Ripple’s Institutional Sales would not have qualified. The offering exceeded the $75 million cap and lacked the disclosures required under FIT21. However, had Ripple structured the sale to meet these limits and filed the necessary information, it might have been eligible for exemption.

Lastly, FIT21 also allows issuers to shift jurisdiction from the SEC to the CFTC through a decentralization certification. By submitting a detailed description of the blockchain’s governance and functionality, an issuer can trigger a 60-day rebuttal period. If the SEC does not object, the asset becomes a digital commodity under CFTC oversight. If Ripple can now credibly certify that the XRP Ledger is decentralized and functional, XRP may transition from a restricted digital asset to a regulated digital commodity.

Summary Table 2:

Type of Sale	FIT21 Outcome	“Investment contract asset”	Transactional Exemption	Certification
Institutional Sale	Likely subject to SEC	Likely qualify	Not eligible (exceeded $75M cap, lacked disclosures)	Decentralization Certification available
Programmatic Sale	Still subject to SEC	Likely qualify	Potentially exempt if restructured	Certification available

IV.          Argument Against the FIT21

A.    Why Regulation May Be Necessary?

The SEC’s mission, among other objectives, is to “protect investors.”[102] Investor protection fosters the development of financial markets. When investors are adequately protected, investors are willing to pay more for securities, making it more attractive for entrepreneurs to issue securities. Shareholder rights play a crucial role in the growth of equity markets, as reflected in corporate valuations, the number of publicly listed companies, and the rate at which companies go public. These protections include not only the shareholder rights enshrined in laws and regulations but also the effectiveness of their enforcement.

Under a traditional corporate structure, shareholders generally can appoint directors and vote on major corporate decisions, such as mergers. In contrast, ICO investors lack control over the founders and creators of the digital ecosystem in which they invest. ICO investors have no preemptive rights or other anti-dilution protections. The only real “control” an ICO investor has is the ability to sell their crypto assets post-ICO. Moreover, ICO investors typically do not receive a liquidity preference that would protect them if the project were to be terminated. By comparison, venture capital firms typically obtain a simple liquidity preference in seed-stage investments. Given the lack of investor protections in the crypto environment, there are a strong policy reasons for regulatory intervention to safeguard ICO investors.

However, securities regulations were not promulgated to protect individuals who recklessly invest in products they do not understand. The purpose of federal securities laws is to promote transparency, deter fraud, and ensure that investors have access to material information so they can make informed decisions. The Securities Act and the Exchange Act are rooted in the philosophy of full and fair disclosure—not merit regulation. In other words, the SEC does not evaluate whether an investment is good or bad, but rather whether the issuer has provided sufficient information for investors to assess the risks. The securities regime is designed to protect investors from deception, not from their own lack of diligence. As such, the law does not—and should not—function as a safety net for individuals who blindly invest in sketchy internet schemes without reading the terms or conducting basic due diligence. Securities laws were not enacted to protect Garry Gullible or Larry Lazy from sinking their 401(k)s into speculative, opaque ventures peddled on websites like PumpAndDump.com.

Some other countervailing considerations warrant attention: first, overregulation could stifle innovation. Excessive regulations may lead to high transaction and disclosure fees, hindering innovation and capital formation. And second, overreaching regulation may appear paternalistic.Such an approach could prompt sophisticated tech-financiers to devise creative instruments to circumvent the law. Laws are enacted to be obeyed and followed—not gamed, exploited, or repurposed as profit strategies.

B.    Congress Should Not Enact FIT21

The key question is not whether President Trump would sign FIT21—he’s already praised it as a landmark crypto framework. The real question is then whether Congress should enact it at all. The answer is emphatically no. FIT21 is regulatory theater masquerading as reform: a solution in search of a problem—and a dangerously overengineered one at that. Worse still, its artificial division between SEC and CFTC jurisdictions opens a regulatory gap ripe for exploitation by sophisticated tech-financiers.

1.     FIT21 Is Not Reform—It’s Repackaging

FIT21 purports to modernize securities law for the digital age, but in doing so, FIT21 attempts to fix a leaky toilet by remodeling the house to build a second bathroom. But the supposed digital asset “leak” in the existing securities framework isn’t a leak at all. The Securities Act and Exchange Act have long accommodated a board range of financial innovation. The Howey test—our common law touchstone for defining “investment contracts”—is not regulatory duct tape, but rather it was built with elasticity. It does not require congressional surgery to keep pace with evolving technologies. On the contrary, its adaptive nature is actually conducive to world of cryptocurrency. The Howey test has already proven capable of adapting, case by case, to digital asset offerings.

In theory, FIT21 appears to offer the tech industry alternative pathways to avoid securities law. But in practice, it adds no real legal substance—only the illusion of innovation.
Its exemptions are rebranded versions of existing doctrines. The transactional exemption is hiding that fact that it is really a “private placement” below the surface. Its decentralization certification is not grounded in statutory necessity but in regulatory convenience. And its attempt to redraw jurisdictional boundaries between the SEC and CFTC offers tech issuers a map without ever redrawing the terrain. The core principles of securities regulation—material disclosure, investor protection, and economic reality—remain unchanged, even though they are inadequately represented. FIT21 merely reframes them in the language of modernization, while offering no new interpretive clarity, no added investor safeguards, and no new legal teeth.

Moreover, issuers have always had access to exemptions like Regulation D, § 4(a)(2), the safe harbors under Rule 506, and many more. Whether or not issuers use them is a matter of strategic choice—not legal incapacity. FIT21, by creating a parallel system, doesn’t fix an oversight. It undermines decades of coherent jurisprudence with a haphazard blueprint.

Proponents of FIT21 argue that digital assets are too complex for current law—that new technologies demand new rules. But this logic collapses under scrutiny. Complexity does not excuse fraud. Nor does novelty absolve investors from the duty to inquire. The “reasonably prudent investor” standard is not a relic of the past. It’s the backbone of securities law. FIT21 dilutes that standard by baking in exemptions and shifting the burden of understanding onto agencies already overstretched.

If the concern is information asymmetry, the solution is not to dismantle the SEC’s gatekeeping function—it’s to enforce it more effectively. That means using the tools we already have, not abandoning them in favor of a bespoke regime designed to appease industry lobbying.

FIT21 is not the future of financial regulation—it is a legislative sleight of hand. It misdiagnoses the ailment, overprescribes the cure, and hands the scalpel to the very industry it’s meant to oversee. Congress should resist the urge to remodel the entire house for a leaky toilet when all that’s needed is to tighten a few bolts.

2.     FIT21 Promotes Regulatory Arbitrage

While FIT21 purports to bring clarity to the treatment of digital assets, it risks inviting regulatory arbitrage—the deliberate structuring of finance instruments to evade more stringent oversight. Unlike principles-based regimes such as the Howey test, which evaluate the economic substance of a transaction, FIT21’s rule-based framework relies on formalistic criteria. This shift may render compliance more predictable, but it also makes the system more vulnerable to manipulation.

First, FIT21 allows issuers to qualify for CFTC oversight by meeting defined criteria for “decentralization.” Projects may engage in cosmetic decentralization—such as dispersing tokens broadly or minimizing visible administrative controls—while the core team still steers the enterprise. Under Howey, courts look past form to function; under FIT21, form may be enough.

Second, the statute invites jurisdictional engineering. FIT21 draws bright lines between SEC and CFTC authority, allowing issuers to optimize project features—intentionally or not—to fall under the CFTC’s traditionally lighter-touch regime. Such a framework risks bifurcating enforcement and weakening core investor safeguards.

Third, FIT21 enables issuers to self-certify that their blockchain is decentralized. If the SEC does not rebut that certification within 60 days, jurisdiction automatically transfers to the CFTC. This mechanism is ripe for exploitation by sophisticated actors, particularly when agency resources are strained. The burden shifts from the issuer to the regulator, inverting the traditional posture of securities law.

The ultimate danger is that a rule-based framework becomes a compliance façade. It enables bad actors to “check the boxes” while circumventing the substance of investor protections. Where Howey leaves discretion to judges to assess real-world dynamics, FIT21 places discretion in the hands of the issuer—an inversion that favors form over function, and self-interest over investor welfare.

Unless Congress reinforces anti-evasion mechanisms and regulators apply decentralization analysis with rigor, FIT21 may become less a modernization of securities law and more a blueprint for regulatory avoidance. The law’s job is not to chase technological trends, but to remain a stable guardian of public trust. On that standard, FIT21 fails.

CONCLUSION

This article has examined the Ripple decision and its two-step distinction, highlighting its implications for cryptocurrency regulation. While transactions to Institutional Buyers were deemed securities, open market Programmatic Sales were not—framing them more as commodity trading than “investment contracts.” This nuanced interpretation underscores the flexibility already embedded within existing legal tools. The push for new legislation, such as the FIT 21 Act, appears less like meaningful reform and more like a repackaging of established doctrines.

Codifying Ripple’s framework could unintentionally create regulatory loopholes, enabling savvy actors to design digital assets that skirt securities laws while functioning as investment vehicles. FIT 21, as argued, risks encouraging regulatory arbitrage rather than deterring it. Rather than drafting new laws, regulators should more effectively apply existing ones.

Ultimately, while crypto has reshaped financial and legal landscapes, the core aim of securities regulation remains unchanged: to deter fraud and protect informed investors—not to shield those unwilling to assess risk. If an opportunity looks sketchy and sounds sketchy, it likely to be sketchy. The law should not overreach to protect those who fall below the “reasonably prudent investor” standard. Instead enacting new statutes, the application of current statutes should be refined to ensure regulatory integrity without unnecessary judicial or legislative innovation.

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[1] SEC, Leaders of CFTC, FinCEN, and SEC Issue Joint Statement on Activities Involving Digital Assets, public statement (Oct. 11, 2019), https://www.sec.gov/news/public-statement/cftc-fincensecjointstatementdigitalassets#ftn4.

[2] SEC v. Ripple Labs, Inc., No. 20 Civ. 10832 (AT), 2023 WL 4507900 (S.D.N.Y. July 13, 2023).

[3] See id.

[4] See Angela Walch, The Path of the Blockchain Lexicon (and the Law), 36 Rev. Banking & Fin. L. 713 (2017).

[5] Micha Benoliel, Understanding the Difference Between Coins, Utility Tokens, and Tokenized Securities, Medium (Aug. 8, 2017), https://medium.com/startup-grind/under-standing-the-difference-between-coins-utility-tokens-and-tokenized-securities-a6522655fb91.

[6] See What Is Bitcoin?, Investopedia (Dec. 5, 2024), https://www.investopedia.com/terms/b/bitcoin.asp. “Bitcoin is a cryptocurrency designed to act as money and a form of payment outside the control of any one person, group, or entity.”; Id.

[7] See Benoliel, supra note 6.

[8] Josiah Wilmoth, The Difference Between Utility Tokens and Equity Tokens, Strategic Coin, https://strategiccoin.com/difference-utility-tokens-equity-tokens/.

[9] See Berdeaux v. OneCoin Ltd., 561 F. Supp. 3d 379, 390 (S.D.N.Y. 2021).

[10] See id.

[11] See Adam Hayes, Blockchain, Investopedia (Sep. 16, 2024), https://www.investopedia.com/terms/b/blockchain.asp.

[12] See id.

[13] See id.

[14] See id.

[15] See Paul Vigna, What’s an Initial Coin Offering? ICOs Explained in 11 Questions, Wall St. J. (Oct. 2, 2017), https://www.wsj.com/articles/whats-an-initial-coin-offering-icos-explained-in-11-questions-1506936601.

[16] See id.

[17] See id.

[18] See Securities and Exchange Commission, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207 (July 25, 2017).

[19] See id.

[20] See Atul Mittal, Shocking ICO Statistics 2024: You Must Know Before Investing, SAG IPL Blog (Nov. 5, 2024), https://blog.sagipl.com/ico-statistics/.

[21] See id.

[22] See Biggest ICO of 2024: IntelMarkets Stuns with $770K Raised in 36 Hours, Bitcoinist, https://bitcoinist.com/biggest-ico-of-2024-intelmarkets-stuns-with-770k-raised-in-36-hours-cardano-price-could-pump-to-2-this-weekend/?utm_source=chatgpt.com.

[23] See id.

[24] See id.

[25] See id.

[26] Haliey Welch is known for her viral “Hawk Tuah” meme.

[27] See Wolf Popper LLP, Wolf Popper LLP and Burwick Law File Lawsuit Against Creators and Promoters of Hawk Memecoin (Dec. 19, 2024) https://www.wolfpopper.com/news/wolf-popper-llp-and-burwick-law-file-lawsuit-against-creators-and-promoters-of-hawk-memecoin.

[28] See id.

[29] See id.

[30] In a pump and dump scheme, fraudsters typically spread false or misleading information to create a buying frenzy that will “pump” up the price of a stock and then “dump” shares of the stock by selling their own shares at the inflated price. Once the fraudsters dump their shares and stop hyping the stock, the stock price typically falls and investors lose money.  See Pump-and-Dump Schemes, U.S. Sec. & Exch. Comm’n, https://www.investor.gov/introduction-investing/investing-basics/glossary/pump-and-dump-schemes.

[31] Complaint, Albouni v. Tuah The Moon Foundation, overHere Ltd., Clinton So, and Alex Larson Schultz, No. 1:24-cv-8650 (E.D.N.Y. filed Dec. 19, 2024) consolidated with Rodriguez Mena v. Schultz, No. 1:24-cv-8965 (E.D.N.Y.).

[32] See id.

[33] See 15 U.S.C. § 77e.

[34] See Jumpstart Our Business Startups Act, 15 U.S.C. § 77b(a)(19).

[35] See 17 C.F.R. § 229.301.

[36] See 15 U.S.C. § 77k.

[37] See 17 C.F.R. § 240.10b-5.

[38] Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 740 (1975).

[39] 15 U.S.C. § 77b(a)(1). The Securities Act defines “security” to mean “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, or group or index of securities . . . or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security,’ or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” Id. (emphasis added).

[40] Golden v. Garafalo, 678 F.2d 1139, 1144 (2d Cir. 1982).

[41] 328 U.S. 293 (1946).

[42] Id. at 299.

[43] Id.

[44] United Hous. Found. v. Forman, 421 U.S. 837, 849 (1975).

[45] See e.g., SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 480 (9th Cir. 1973).

[46] See e.g., Albanese v. Fla. Nat’l Bank of Orlando, 823 F.2d 408, 410 (11th Cir. 1987).

[47] See e.g., Smith v. Gross, 604 F.2d 639, 642-43 (9th Cir. 1979).

[48] See e.g., Miller v. Cent. Chinchilla Grp., Inc., 494 F.2d 414, 417 (8th Cir. 1974).

[49] See SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308, 316 (S.D.N.Y. 2023).

[50] See id. at 317.

[51] See id. at 316.

[52] See id. at 317-18.

[53] See id. at 318.

[54] See Ripple, 682 F. Supp. 3d at 318.

[55] See Complaint at ¶ 10, SEC v. Ripple Labs, Inc., No. 20-cv-10832 (S.D.N.Y. Dec. 22, 2020), ECF No. 1. Accord Amended Complaint at ¶ 9, SEC v. Ripple Labs, Inc., No. 20-cv-10832 (S.D.N.Y. Feb. 18, 2021), ECF No. 46.

[56] See Ripple, 682 F. Supp. 3d at 335.

[57] See id. at 324.

[58] See id. at 328.

[59] Id. at 325.

[60] See SEC v. SG Ltd., 265 F.3d 42, 49-50 (1st Cir. 2001).

[61] See Ripple, 682 F. Supp. 3d at 325.

[62] See id. at 319.

[63] See id. at 326.

[64] See id.

[65] Id. at 328.

[66] See id.

[67] See id.

[68] See id.

[69] See id.

[70] See id. at 331.

[71] See id. at 329; See also SEC v. Telegram Grp. Inc., 448 F. Supp. 3d 352, 371 (S.D.N.Y. 2020) (explaining that “[t]he inquiry is an objective one focusing on the promises and offers made to investors; it is not a search for the precise motivation of each individual participant.”).

[72] Id. at 328.

[73] See id. at 329.

[74] See id.

[75] See id.

[76] See id.

[77] See id. at 330.

[78] See id.

[79] See id.

[80] See id.

[81] See 15 U.S.C. § 77d(a)(2) (2022).

[82] Form D is a short notice filed electronically with the SEC after the first sale.

[83] See 17 C.F.R. § 230.506(b).

[84] Id.

[85] Ripple, 682 F. Supp. 3d at 316. See also 17 C.F.R §§ 230.501(a) (1), (3), (8) (defining an “accredited investor”).

[86] Ripple, 682 F. Supp. 3d at 317.

[87] Ripple’s ODL and XRP: Transforming Remittance Models in Emerging Markets, Tech. Innovators (Jan. 26, 2025), https://www.technology-innovators.com/ripples-odl-and-xrp-transforming-remittance-models-in-emerging-markets/.

[88] Ripple, 682 F. Supp. 3d at 317-19.

[89] Exec. Order No. 14,067, Ensuring Responsible Development of Digital Assets, 87 Fed. Reg. 14,143 (Mar. 9, 2022).

[90] Financial Innovation and Technology for the 21st Century Act, H.R. 4763, 118th Cong. (2024) (as passed by House, May 22, 2024) [Hereinafter “FIT21”]. FIT21 takes a pro-market, innovation-friendly stance, prioritizing regulatory clarity and limiting enforcement discretion. It’s viewed as more favorable to crypto industry players than the Biden administration’s approach.

[91] Id. § 102(a)–(b).

[92] Id. § 201.

[93] See Exec. Off. of the President, Statement of Administration Policy, H.R. 4763 – Financial Innovation and Technology for the 21st Century Act (May 22, 2024), https://www.whitehouse.gov/wp-content/uploads/2024/05/SAP-HR-4763.pdf.

[94] See Gary Gensler, Chair, U.S. Sec. & Exch. Comm’n, Statement on the Financial Innovation and Technology for the 21st Century Act (May 22, 2024), https://www.sec.gov/news/statement/gensler-statement-hr4763-052224. While the SEC continues to urge crypto-market participants to “come in and register,” critics—including SEC Commissioner Hester Peirce—have pointed out the absence of a coherent legal framework governing digital assets. Commissioner Peirce has consistently advocated for moving beyond the SEC’s current approach of “regulation by enforcement,” instead calling on the Commission to collaborate with Congress to establish clear, forward-looking regulatory guidance for participants in the crypto marketplace; See Hester M. Peirce, Comm’r, U.S. Sec. & Exch. Comm’n, Outdated: Remarks Before the Digital Assets at Duke Conference (Jan. 20, 2023), https://www.sec.gov/news/speech/peirce-remarks-duke-conference-012023.

[95] Exec. Order No. 14,178, Strengthening American Leadership in Digital Financial Technology, 90 Fed. Reg. 11,789 (Jan. 23, 2025).

[96] Debevoise & Plimpton LLP, Crypto Assets Under the Trump Administration (Feb. 2025), https://www.debevoise.com/-/media/files/insights/publications/2025/02/crypto-assets-under-the-trump-administration.pdf.

[97] See id.

[98] See id.

[99] See Cong. Rsch. Serv., An Overview of H.R. 4763, Financial Innovation and Technology for the 21st Century Act (May 17, 2024), https://crsreports.congress.gov/product/pdf/IN/IN12223.​

[100] FIT21 at §101(29).

[101] Id. at §101(34)(A)(i)–(iii).

[102] See Securities Exchange Act of 1934, 15 U.S.C. § 78c(f); see also U.S. Sec. & Exch. Comm’n, The Role of the SEC, https://www.sec.gov/about/what-we-do.