Now returning to SEC Chair for a third time, Paul Atkins appears to be willing to work with Congress to make crypto work. He promises welcome clarity, touts entrepreneurs who deserve rules, and even gives a shout out to Hester Pierce, crypto’s favorite commissioner. Congress’ FIT21 is on the table, which would make a clean break and divide up the crypto regulatory pie between the SEC and CFTC. Sounds great, right? Wrong.

Don't be fooled. This isn't some kumbaya moment for crypto. It's a potential trap. As reassuring as Atkins’ sentiments may be, the road to regulatory hell is certainly paved with good intentions. FIT21 has tremendous potential, but it could set in motion a number of adverse effects. These outcomes could curb innovation and further concentrate power, which runs counter to the fundamental philosophies underlying cryptocurrency.

Clear Rules? More Like Regulatory Overkill

The idea of clear rules is appealing. Say goodbye to the guessing game of if your token is a security. What if those “clear rules” are so burdensome and complex that… This would leave only the largest and most well-funded players able to deliver on that. Picture that world where the next Bitcoin or Ethereum doesn’t blossom. The challenge could be all the regulatory hurdles that prove too high to jump.

Think about it. The bill proposes a split: CFTC for "digital commodities," SEC for "restricted digital assets." The devil's in the definitions. Who decides what's truly decentralized? What about projects that begin decentralized but mature? This sets a troubling precedent where agencies can pick and choose what assets to classify and stifle innovation in the process.

Even worse, this is precisely what the advocates for hardline traditional finance want. They have the lobbyists, the lawyers, the compliance departments to you know, work their way through this regulatory labyrinth. Small startups? Forget about it.

Decentralization's Death By A Thousand Forms

FIT21 seeks to carve out a new definition of “digital commodities” to mean only decentralized assets that exist on interoperable blockchains. Decentralization isn’t binary. It's a spectrum. What if a project is deemed not sufficiently “decentralized enough” to even meet the threshold of being a digital commodity? Does it get crushed under the SEC’s iron fist?

This creates a perverse incentive. Projects might be forced to appear more decentralized than they actually are, using governance structures that are performative rather than meaningful. Or they could simply decide to abandon the market and discontinue US operations. This unfortunate decision would deprive the American economy of both innovation and opportunity.

Now, just imagine that parallel to the early days of the internet. Imagine if instead the government had sought to enforce regulations on the internet, depending on how “decentralized” the internet was. Without these critical investments early on, would we have the dynamic, creative, groundbreaking ecosystem that we boast today? Probably not.

Custody Rule Changes: A Trojan Horse?

Atkins’ willingness to revisit the custody rule is, of course, a recognition of the hurdles that crypto custodians are experiencing. Sounds helpful, right? Again, not so fast.

The current custody rules are indeed problematic. Any loosening would very likely end up being the Trojan Horse that allows them to move further and faster to restrict access to crypto. Now, picture a much more limited world where only fully vetted custodians, subject to extreme regulation and oversight, can custody digital assets. This is a sure way to re-centralize control over the entire crypto ecosystem.

This isn't about protecting investors. It's about controlling the flow of capital. Really it’s about making sure that crypto never escapes the clutches of the current financial elite. They’re not able to win against us, so they’re trying to join us and seize control over us.

Unintended Loopholes: Bad Actors Win

Any complex piece of legislation is going to include loopholes. One unified bill FIT21, with its long, complicated attempt to define and distinguish digital assets, is practically begging for them. The question becomes, what happens when sophisticated and bad-faith actors use these loopholes to circumvent regulation?

We've seen this movie before. The history of financial regulation since the dawn of time is a never ending game of whack-a-mole between regulators and the rule dodgers. While FIT21 is on the right path trying to establish a clear framework, it could unintentionally open up new avenues for bad actors to flourish. Whatever you do, never underestimate the creativity of the private sector to find methods to profit off regulatory arbitrage.

This isn't just theoretical. The complexity of FIT21 could allow sophisticated actors to structure their operations in ways that exploit ambiguities in the law, leaving regulators playing catch-up.

Innovation Stifled, The American Dream Derailed

The biggest unintended consequence of FIT21? The stifling of innovation. By doing so, we’re creating a confusing and duplicative regulatory atmosphere that could drive this innovation overseas, taking the US out of the competition.

After all, crypto has long claimed to be about making the little guy more powerful. It makes laudable claims to democratizing access to finance and creating a new technological revolution. FIT21, as it’s now written, would go a long way to unravel that guarantee. It risks making crypto as boring and pedestrian as every other over-regulated, over-centralized, government controlled industry run by the connected few instead of the dispersed many.

Now, Paul Atkins might sincerely think that he’s doing the crypto industry a big favor by introducing some clarity and order. However, the road to hell is often paved with good intentions. We need to be wary and look critically at FIT21. Join us in advocating for a regulatory framework that fosters innovation, protects decentralization, and truly empowers individuals instead of the old financial guard.

This isn't just about crypto. It’s not only about the future of technology, it’s about the future of innovation, the future of finance, and the future of freedom. Don’t allow FIT21 to end up a trap that limits the very potential it purports to liberate.