Crypto Legislation History: From Token Taxonomy to FIT21

The Pioneer: The Token Taxonomy Act

In the history of United States cryptocurrency regulation, few bills have been as influential in shaping the conversation as the Token Taxonomy Act. First introduced in 2018 and re-introduced in 2019 and 2021 by Representatives Warren Davidson (R-OH) and Darren Soto (D-FL), this bipartisan legislation sought to solve the industry’s most persistent problem: the definition of a security.

The core premise of the Token Taxonomy Act was bold but simple. It proposed amending the Securities Act of 1933 and the Securities Exchange Act of 1940 to specifically exclude “digital tokens” from the definition of a security. The bill argued that once a network becomes decentralized, the token functions more like a currency or a commodity than a stock certificate. While the bill ultimately failed to gain enough traction to pass into law, it laid the intellectual groundwork for every major piece of crypto legislation that followed.

Why It Didn’t Pass

Despite strong support from the industry, the Token Taxonomy Act faced significant hurdles during its time:

• Regulatory Resistance: The SEC, under multiple administrations, maintained that existing securities laws (based on the 1946 Howey Test) were sufficient to regulate digital assets.
• Lack of Consensus: In 2019, Congress was still largely uneducated on blockchain technology. The idea of creating a sweeping exemption for digital assets was viewed as too risky by many lawmakers.
• Competing Priorities: The bill was often sidelined by broader financial debates and lacked the comprehensive market structure provisions found in later proposals.

The Successor: The FIT21 Act

Fast forward to 2024, and the spirit of the Token Taxonomy Act has found a new vessel: the Financial Innovation and Technology for the 21st Century Act (FIT21). Unlike its predecessor, FIT21 achieved a historic milestone by passing the U.S. House of Representatives in May 2024 with significant bipartisan support.

FIT21 incorporates many of the definitions sought by Davidson and Soto but goes much further. Instead of a simple exemption, it creates a complete regulatory framework that divides jurisdiction between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).

Key Provisions of FIT21:

• The Decentralization Test: FIT21 introduces a formal process to determine if a blockchain is decentralized. If a network meets these criteria, its token is classified as a digital commodity under the CFTC’s jurisdiction. If it remains centralized, it stays under the SEC. This directly addresses the “Token Taxonomy” problem.
• Consumer Protections: The act imposes strict rules on intermediaries (exchanges) regarding the segregation of customer funds, directly responding to failures like FTX.
• Secondary Markets: It establishes a pathway for digital assets to be traded on regulated secondary markets, a key goal of the original 2019 legislation.

The Legacy of Davidson and Soto

Representatives Warren Davidson and Darren Soto remain two of the most active voices in the Congressional Blockchain Caucus. Their work on the Token Taxonomy Act was not in vain; it educated a generation of staffers and lawmakers on the nuance of digital assets.

Representative Davidson has since pivoted some of his focus toward privacy and the prevention of Central Bank Digital Currencies (CBDCs), aiming to ban the Federal Reserve from issuing a digital dollar that could be used for surveillance. Meanwhile, the definitions they drafted years ago regarding what constitutes a “digital token” can be seen in the DNA of the FIT21 Act.

Conclusion

The Token Taxonomy Act may be a “dead” bill in the legislative sense, but its impact is very much alive. It started the difficult work of untangling 1930s securities laws from 21st-century technology. As the U.S. moves closer to a comprehensive regulatory framework with FIT21, the industry owes a debt of gratitude to the early efforts that made the distinction between a “security” and a “token” a matter of national debate.