Author: Iris, Liu Honglin, Manqun Law Firm
The 2024 US presidential election has finally come to an end, and Trump, who has received a lot of attention and support from the crypto industry, has also "returned to the palace". I wonder if your friends' circles were flooded at that time. Unlike the previous administration, his return to the White House this time may bring a more friendly and favorable regulatory policy environment for the crypto industry.
* Source: X.com
During the election, there were frequent "strange moves" such as BTC strategic reserves, Americanization of mining, and dismissal of the current SEC chairman. But to say the key regulations that will affect the development of crypto assets and Web3 projects in the next few years, it is the "Financial Innovation and Technology for the 21st Century Act" (FIT21). Currently, this bill has been passed by the US House of Representatives with a high vote of 279:136, and it is very likely to be quickly passed by the Senate and enacted under the Trump administration.
We all know that most Web3 projects will choose to establish a foundation to coordinate with local and global regulations after their scale development. So, what impact will the FIT21 Act have on Web3 projects, especially Web3 foundations? First, let Manqun Lawyers help you sort out the core of FIT21.
FIT21 Act: Redefining Crypto Assets
The FIT21 Act, led by the Republican Party, on the one hand responds to the crypto industry's long-standing concerns about regulatory uncertainty, and on the other hand outlines clearer regulatory boundaries for the crypto industry, while also attempting to reduce potential market chaos at the source. The most notable aspect of this bill is the redefinition of which crypto assets can be considered "commodities" rather than "securities", a distinction that directly determines the type of regulation these assets will be subject to.
To achieve this purpose, the FIT21 Act has established three core judgment criteria to help define the nature and regulatory scope of assets:
1. 20% Token Control Threshold
The FIT21 Act stipulates that if any single entity or affiliated party controls more than 20% of the tokens, the project will be classified as a security and subject to strict SEC regulation. The purpose of this provision is to prevent the market from being manipulated by a few major holders.
For projects that hope to be recognized as "commodities" and receive more relaxed regulation, this "20% cap" is both a constraint and a compliance guideline. Project parties need to design a reasonable token distribution plan to disperse control among many holders, forming a distributed governance model, rather than being controlled by a small core team.
2. Decentralized Governance Structure
The FIT21 Act also has strict requirements for "decentralized governance", aiming to ensure that the project's decision-making mechanism truly achieves "decentralization". This involves not only the dispersion of control, but also the transparency and independence of governance. For example, projects need to introduce a publicly transparent voting mechanism to allow token holders to truly participate in key decisions. In this way, governance is not only superficially decentralized, but has substantive public participation.
In addition, the Act also proposes standards for the transparency of the governance structure. In simple terms, project parties need to publicly disclose key governance rules and processes, such as the execution conditions for major decisions or the trigger rules for the code, so that token holders can clearly understand the project's operation, reducing the possibility of "black box operations" by the core team. This transparent governance structure can win more user trust for the project, and is also an effective means of compliance.
3. Information Disclosure and Transparency Requirements
The FIT21 Act has relatively flexible requirements for information disclosure, providing different disclosure standards based on the degree of decentralization and the nature of the project. For projects that meet the decentralization requirements and are classified as "commodities", the Act allows them to enjoy relatively relaxed information disclosure obligations, but key financial information, token distribution, and community governance proposals still need to be publicly disclosed on a regular basis to ensure transparency. For projects that are considered securities, they need to undergo comprehensive financial disclosure like traditional securities to ensure investor rights.
At the same time, in addition to setting standards, the FIT21 Act very humanely introduces a "safe harbor" clause to provide crypto projects with a critical compliance transition period. For projects that have not yet fully achieved decentralization, as long as the project parties promise to meet the decentralization standard within a specified time, they can continue to operate under the exemption period without being subject to the strict constraints of securities regulation. This clause gives project parties time to gradually improve their governance structure and community management, reducing the risk of short-term adjustments due to compliance pressure. This flexible buffer mechanism not only protects the innovation space of project parties, but also ensures their long-term compliance direction, creating a stable policy environment for the healthy development of the crypto industry.
So, in the context of the imminent enactment of the FIT21 Act, how should Web3 projects respond in terms of token governance and organizational structure?
Manqun Lawyers have long recommended and assisted Web3 project parties in establishing foundations to ensure global compliance (for support, you can add Manqun customer service: MankunLawFirm). At the same time, they have also published articles sharing the advantages of setting up a foundation and the establishment plan, such as "Web3 Project Compliance: Why Choose the Cayman Foundation for Token Issuance?" and "V God's Selection: Why Choose the Swiss Foundation for Web3 Project Token Issuance?".
So, after establishing a foundation, how can this organizational structure comply with the decentralization standards of the FIT21 Act? Coincidentally, the Ethereum Foundation (EF) has released its 2024 annual report. Manqun Lawyers will interpret it.
Three Key Points in the Ethereum Foundation 2024 Report
The 2024 annual report released by the Ethereum Foundation this time is only 27 pages long, but the information is very rich. From the organizational structure to the treasury funds, and then to the annual expenditures, the Ethereum Foundation's report has clear disclosures, allowing us to have a glimpse of the structure and current status of the world's largest Web3 foundation.
Manqun Lawyers specially reminds: For Web3 project parties who want to establish a foundation, this report is a compliant "sample room". Next, combined with the FIT21 Act, we will unpack the compliance path of the Ethereum Foundation in responding to regulations, and you all please "take good notes".
1. Decentralized Governance
In the 2024 annual report, the Ethereum Foundation has detailed the functions and divisions of multiple key teams, including the development team, research department, ecosystem support team, and risk management group. These teams operate independently and supervise each other. Not only do they have clear divisions of labor in technical development and project support, but they also demonstrate the foundation's commitment to decentralization in the governance structure. For example, the development team focuses on the technical upgrades of the core protocol, the research department is responsible for future innovation exploration, and the ecosystem support team promotes community education and ecosystem expansion. This functional division avoids the concentration of decision-making power in a single team, ensuring the decentralization of governance.
In addition, the foundation also decentralizes some key decision-making power to token holders and ecosystem participants through community voting and open proposals, allowing the community to truly participate in the future development of the project. This way, not only are the team's functional boundaries clear, but the governance also maintains transparency and community-based. This governance model is fundamentally in line with FIT21's requirements for decentralization, reducing the risk of single-control manipulation, and providing a guarantee for the long-term healthy development of the project.
2. Treasury Asset Holding
The 2024 annual report of the Ethereum Foundation disclosed its current treasury asset holding situation. The data shows that the Ethereum Foundation currently holds a total of $788.7M in crypto assets, of which 99.45% are ETH, with a total value of approximately $784.4M. Combining the current ETH market data, the Ethereum Foundation holds approximately 261,000 ETH, accounting for about 0.22% of the total ETH supply.
This data indicates that the Ethereum Foundation's ETH holding ratio is maintained at a relatively low level, avoiding excessive impact on the market and reducing the liquidity pressure of concentrated holdings, and is far below the 20% red line of the FIT21 Act, ensuring that ETH will no longer be subject to the SEC's criticism of being a security under the new law. In addition to crypto assets, the Ethereum Foundation also holds about $300 million in traditional financial assets such as fiat currency and bonds, ensuring its risk resistance in market volatility.
This diversified financial management approach not only increases financial resilience, but also demonstrates the Ethereum Foundation's emphasis on decentralization and transparency. This "light-weight holding + diversified allocation" financial strategy also provides an important reference for other Web3 projects: while promoting ecosystem development, ensure long-term financial support through reasonable allocation, laying a solid foundation for more resilient growth in the ever-changing regulatory environment.
3. Annual Financial Data
The 2024 annual report of the Ethereum Foundation detailed the financial situation over the past two years, clearly showing the status of fund utilization and management in 2022 and 2023. The data shows that the foundation's expenditures are mainly concentrated in three major areas: core development, ecosystem grants, and operational reserves, covering the security upgrades of the core protocol, ecosystem support, and risk management.
Specifically, the report shows that the Ethereum Foundation has made significant investments in core protocol development over the past year, including the research and development of emerging technologies such as Layer 2 scaling and zero-knowledge proofs, in order to maintain the innovation and security of the Ethereum network. In addition, the foundation has increased its support for the ecosystem, supporting the developer community and the incubation of various new projects, thereby promoting the long-term development of the Ethereum ecosystem. These grant programs cover new project incubation, educational training, and community activities, providing momentum for the sustainability of the Ethereum network.
The Ethereum Foundation's transparent financial management strategy is in line with the financial disclosure requirements of the FIT21 Act, providing a strong compliance reference for the future development of the Web3 industry. At the same time, this fully transparent data disclosure also helps to build market trust and lays the foundation for the sustainable development of the project in terms of compliance and resilience.
Advice from Lawyer Mankun
Currently, with the inauguration of Trump, the FIT21 Act seems to have been "nailed down". Just like the impact of the EU's MiCA regulation on global crypto asset regulation, once the FIT21 Act is formally passed by the Senate and enacted, it will undoubtedly have a crucial impact on the classification of global crypto assets. Therefore, whether for those who want to establish a foundation or for Web3 projects that are already considering compliance regulations, it is necessary to "copy" the "homework" of the Ethereum Foundation:
Reasonable token allocation and implementation of decentralized governance
The FIT21 Act's 20% control threshold requires many projects to be more cautious in token allocation. Therefore, it is crucial to design a reasonable token allocation plan at the initial stage of the project. By introducing multi-party governance mechanisms such as token holder voting and community proposal management, the decision-making power is gradually decentralized to community members. This transparent governance model not only helps the project meet the decentralization standards of FIT21, but also greatly enhances community participation, laying a solid foundation of support for the project.
Diversify asset holding to enhance financial resilience
The diversified financial allocation strategy demonstrated by the Ethereum Foundation is a typical robust approach, not only holding crypto assets, but also covering traditional financial instruments such as fiat currency and bonds. Web3 projects can also refer to the diversification of fund management, avoiding the concentration of a single asset, especially the market volatility risk caused by highly volatile crypto assets. Through flexible allocation, project parties can maintain sufficient liquidity and risk resistance in market fluctuations, ensuring financial stability and providing reliable support for the long-term development of the project.
Emphasize information disclosure and transparency building
Under the FIT21 framework, information disclosure has become one of the key factors affecting project compliance. Web3 projects should proactively disclose key information such as fund flows, token distribution, and governance mechanisms. They can refer to the disclosure approach of the Ethereum Foundation, regularly publishing project development progress, fund utilization, and other key information, providing reliable reference data for the community and investors. This not only helps with compliance, but also fosters community trust and reduces potential legal and reputational risks.
Of course, if you intend to establish a Web3 foundation and hope to achieve compliance in the start-up stage, Mankun Law Firm will be a trustworthy partner. As a law firm deeply involved in the blockchain and new economy field, our team has several experienced Web3 lawyers, covering areas such as foundation location, establishment, and architectural design, and has successfully co-organized foundation projects multiple times.
We always believe that compliance is not only a protection for the project, but also the cornerstone for the robust development of the Web3 industry. If you have relevant needs, feel free to consult Mankun Law Firm, and we will be happy to provide you with compliance consulting and professional guidance, helping your project develop in a compliant and resilient manner in the Web3 ecosystem, and jointly promote the Web3 industry towards a more compliant and transparent future.
