The SEC's lawsuits against companies within the digital asset ecosystem, such as SEC v. Ripple, SEC v. Terraform and SEC v. Coinbase, reveal there is a difference in opinion on digital assets between the SEC and major digital asset companies. The difference also is apparent in the SEC's decision on Grayscale Investment's spot bitcoin exchange-traded fund (ETF) application.

Recently, a three-judge panel on the District of Columbia's Court of Appeals ruled that the SEC's reasoning behind its denial of Grayscale's spot bitcoin ETF was arbitrary and capricious. Within its denial, the SEC stated that a spot bitcoin ETF could manipulate future bitcoin ETF prices. Although the SEC can appeal the decision and reject new applications, the ruling represents progress for companies submitting spot-ETF applications while highlighting the determined approach taken by the SEC.

The disparity in opinion between the SEC and Grayscale, Coinbase, Ripple and Terraform raises the question of whether the definition, and framework as a whole, for digital assets should be the responsibility of Congress. While FIT21 attempts to establish a framework around digital assets, the definition of what a digital asset is should come from Congress. By defining digital assets Congress provides the dual benefits of democratic legitimacy and the capacity for open debate, ensuring that various perspectives are considered.

Aside from FIT21, several other crypto-related bills are making their way through Congress, including one set to take effect in 2024. The Infrastructure Investment and Jobs Act is law that impacts the tax-reporting requirements for digital assets.

The requirements are part of a new code section and amendments that include a definition for digital assets as "any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary." There are last-minute attempts by Congress and the Biden Administration to delay the new tax-reporting requirements, and whether the IRS definition of digital assets changes remains to be seen.

The IRS definition is not uniformly followed by proposed pieces of legislation focused on digital assets. The Keep Your Coins Act of 2023 omits the definition of "digital asset" and instead categorizes the currency and technological aspects of Bitcoin and Ethereum as "convertible virtual currencies." In addition, various federal and state agencies, as well states, have proposed legislation with their own unique definition of digital assets.

The inconsistencies in defining "digital assets" only slightly mirrors the chaos of the digital asset industry as a whole. Without congressional action, the divergence will only grow and companies and federal agencies will continue to battle inside the courtroom. Aside from creating unnecessary complexities for companies by leaving digital assets undefined, the CFTC and the SEC would once again find themselves in a tug of war over control of digital assets.

The CFTC and SEC have been jostling for authority over digital assets since 2015, when the CFTC released its first official statement claiming regulatory control over digital assets. An undefined term by Congress would bring us back to square one with the SEC and CFTC arguing over what qualifies as a digital asset and whether the respective agency has dominion. Key to this dichotomy are the Major Questions Doctrine (courts will presume that Congress does not delegate to executive agencies issues of major political or economic significance) and the Chevron Deference (the latitude federal judges give agencies over how to interpret a statute when a dispute arises).

The Major Questions Doctrine posits that courts should refrain from interpreting ambiguous statutory language to confer vast regulatory authority on administrative agencies, unless Congress has explicitly indicated its intent to do so. For the SEC, this could serve as a constraint, directing the courts to be cautious in assigning new regulatory powers.

Recently, the court in Terraform v. SEC examined the Major Questions Doctrine and found that it was inapplicable since "the crypto-currency industry — though certainly important — falls far short of being a portion of the American economy bearing vast economic and political significance." The court ultimately denied Terraform's motion to dismiss based on the pleadings, and ordered discovery to go forward.

However, Coinbase has filed a motion to dismiss alleging that the SEC's attempt to regulate digital assets under the "investment contract" framework violates the Major Questions Doctrine. Coinbase contends that the digital asset industry, worth around $1 trillion, is clearly significant, and specifically references FIT21.

The Chevron Deference gives agencies latitude in interpreting ambiguous statutory language where Congress hasn't been explicit. Currently, under review in the Supreme Court is the matter Loper Bright Enterprises v. Gina Raimondo, which will only address the deference afforded to agencies.

In Loper, a herring fish company is contesting a regulation stating they must allow a federal observer onboard their vessels and mandating that the fishing company compensate these observers for their time. Loper is arguing the federal statute's ambiguity does not equate to deference to the federal agency.

If the doctrine undergoes changes, it could significantly impact the SEC's ability to regulate in areas where Congress has not provided clear guidance, increasing the need for Congress to be explicit in its statutory mandates. The reversal of authority could ultimately result in Congress being forced to define digital assets, irrespective of what is included in FIT21, or any other legislation related to digital assets.

The patchwork of definitions across varying bills underscores the urgent need for a consistent and comprehensive definition of "digital asset" in FIT21. The term encompasses a diverse range of assets, from cryptocurrencies to NFTs. The term also predates Blockchain technology and has been used in cases involving Blockchain technology and cryptography.

The ambiguous nature of digital assets makes it imperative to have a definition that can serve as a cornerstone for future legislation and regulatory actions. In the absence of a clear definition, there is the risk of unforeseen ramifications extending beyond securities regulation. For example, how would a vaguely defined "digital asset" interface with existing laws on estate planning or contracts? The repercussions for an undefined term could extend "off the Blockchain" and create unnecessary confusion and litigation.

This new technology already intersects with various components of our federal government, including economic competitiveness, national security and financial stability. A definition by Congress would set the tone for U.S. leadership in this growing market and enable compatibility with international frameworks.

The move of FIT21 from the House to the Senate signals congressional intent to comprehensively govern digital assets. It seems appropriate that Congress defines what it intends to govern. In the event the legislation stalls, a favorable ruling in the Coinbase and/or Loper matters could force Congress's hand, but action by Congress in FIT21 would avoid legal proceedings and simultaneously affirm U.S. leadership in the digital asset landscape.