How The FIT Act of 2023 Defines "Decentralized Network"?

As of July 20th, 2023, the “Financial Innovation and Technology for the 21st Century Act” or FIT for the 21st Century Act defines a decentralized network as a blockchain system that meets the following conditions:

• No single entity has control over the system. This means that no person or entity has the unilateral authority to control or materially alter the functionality or operation of the blockchain system.
• No single entity has a majority stake in the system. This means that no person or entity beneficially owns, in the aggregate, 20% or more of the total amount of units of the digital asset that can be created, issued, or distributed in the blockchain system.
• The system is not controlled by a centralized governance system. This means that the system is not controlled by a single entity or group of entities that have the ability to make decisions about the system's functionality or operation.
• The system has not been materially altered by the digital asset issuer or any affiliated person in the past 3 months. This means that the digital asset issuer or any affiliated person has not made any changes to the system that would materially alter its functionality or operation.
• The digital asset has not been marketed to the public as an investment in the past 3 months. This means that the digital asset issuer or any affiliated person has not made any statements or representations that could be interpreted as suggesting that the digital asset is an investment.
• All issuances of units of the digital asset were end user distributions made through the programmatic functioning of the blockchain system. This means that all units of the digital asset were issued to users of the system through the normal operation of the blockchain system, and not through any centralized or discretionary process.

The FIT Act's definition of "decentralized network" is designed to ensure that digital assets that are considered to be securities are subject to the same regulatory requirements as other securities. The definition is also designed to protect investors from fraud and manipulation.

Here are some of the key implications of the FIT Act's definition of "decentralized network":

• Digital assets that meet the definition of a decentralized network will not be considered securities. This means that they will not be subject to the same regulatory requirements as other securities, such as the registration requirements of the Securities Act of 1933.
• Digital assets that do not meet the definition of a decentralized network may be considered securities. This means that they will be subject to the same regulatory requirements as other securities.
• The definition of a decentralized network is complex and may be difficult to apply in some cases. This means that it is important to seek legal advice if you are unsure whether a digital asset meets the definition.

Why is it important to further define and understand "unilateral" or "unilaterally" in the context of the FIT Act's definition of a decentralized network?

The term "unilateral" is used in the definition to mean that a person or entity must have the ability to control or materially alter the functionality or operation of the blockchain system without the consent of any other person or entity. This means that the person or entity must have the ability to make decisions about the system's functionality or operation that cannot be overridden by any other person or entity.

In the context of crypto, this could mean that a person or entity could be considered to have unilateral control over a blockchain system even if they do not have a majority stake in the system or if they do not control the source code.

For example, if a person or entity is the founder of a crypto project and they have a large following in the crypto community, they may be able to exert "control" over the project simply by making statements or taking actions that influence the behavior of other users of the system.

This is why it is important to further define and understand the term "unilateral" in the context of the FIT Act's definition of a decentralized network. If the definition is not clear, it could be difficult to determine whether a particular blockchain system is considered to be decentralized. This could have implications for the regulatory status of digital assets that are associated with these blockchain systems.

In addition to defining the term "unilateral," it is also important to define the term "indirect" in a comprehensive fashion. This is because indirect control could also be a way for a person or entity to exert control over a blockchain system without having a majority stake in the system or control over the source code.

For example, if a person or entity has a close relationship with the founder of a crypto project, they may be able to exert indirect control over the project through that relationship.

By defining the terms "unilateral" and "indirect" in a comprehensive fashion, the FIT Act could help to ensure that the definition of a decentralized network is clear and that digital assets that are associated with decentralized networks are not subject to unnecessary regulatory scrutiny.

Let's take the example of Ethereum and Vitalik Buterin to illustrate

Vitalik Buterin is the co-founder of Ethereum, one of the top 5 most popular blockchain platforms. He is also a prominent figure in the crypto community and has a large following on social media.

If Vitalik Buterin were to make a statement or take an action that influenced the behavior of other users of the Ethereum network, it could be argued that he would be exerting "control" over the network, even if he does not have a majority stake in the network or control over the source code.

For example, if Vitalik Buterin were to tweet that he was no longer confident in the future of Ethereum, it is possible that this could cause the price of ETH to decline. This is because his statement could influence the behavior of other users of the network, who may decide to sell their ETH if they believe that Vitalik Buterin is no longer confident in the project.

In this example, Vitalik Buterin would not be exerting "control" over the Ethereum network in a unilateral fashion. However, he could be argued to be exerting "indirect" control over the network through his influence on the behavior of other users.

In a real-life incidence, in 2017, Vitalik himself had to give proof-of-life to prevent damage to Ethereum network after his death hoax, as the price of ethereum fell below $300 within a few hours of this news.

Proof-of-Life: Vitalik Buterin Uses Ethereum to Disprove Death Hoax

Ethereum creator Vitalik Buterin was at the center of a debunked story suggesting that he had died this weekend.

CoinDeskStan Higgins

This is why it is important to define the terms "unilateral" and "indirect" in a comprehensive fashion in the context of the FIT Act's definition of a decentralized network. If the definition is not clear, it could be difficult to determine whether a particular blockchain system is considered to be decentralized. This could have implications for the regulatory status of digital assets that are associated with these blockchain systems.

Summary

The Financial Innovation and Technology for the 21st Century Act (FIT Act) defines a decentralized network as a blockchain system that meets the following conditions:

• No single entity has control over the system.
• No single entity has a majority stake in the system.
• The system is not controlled by a centralized governance system.
• The system has not been materially altered by the digital asset issuer or any affiliated person in the past 3 months.
• The digital asset has not been marketed to the public as an investment in the past 3 months.
• All issuances of units of the digital asset were end user distributions made through the programmatic functioning of the blockchain system.

The FIT Act's definition of a decentralized network is designed to ensure that digital assets that are considered to be securities are subject to the same regulatory requirements as other securities. The definition is also designed to protect investors from fraud and manipulation.

Conclusion

The definition of a decentralized network is complex and may be difficult to apply in some cases. This means that it is important to seek legal advice if you are unsure whether a digital asset meets the definition.

In addition to the terms "unilateral" and "indirect," it is also important to consider the following factors when determining whether a blockchain system is decentralized:

• The level of decentralization of the network's governance structure.
• The distribution of ownership of the digital asset.
• The level of transparency of the network's operations.

By considering all of these factors, it is possible to make a more informed decision about whether a particular blockchain system is decentralized.

For more information, read the H.R.4763 - Financial Innovation and Technology for the 21st Century Act here: https://www.congress.gov/bill/118th-congress/house-bill/4763/text

Disclaimer: While these details align with general legal concepts of affiliated persons, it's important to note that the specific definition and implications of "Affiliated person" under this bill could vary and would need to be verified with the actual text of the bill. This is not legal advise! This is our personal opinion based on the reading and interpretation of this Financial Innovation and Technology for the 21st Century Act.