Congress tries to bring clarity to crypto markets

One place where Washington politicians have worked together is small business capitalization and the nascent token economy. The regulatory space around digital tokens is befuddling. The Token Taxonomy Act (Act) (H.R. 7356) introduced by Reps. Warren Davidson (R-OH) and Darren Soto (D-FL)tries to sort the muddled mess.

The Act amends the Securities Act of 1933 and the Securities Exchange Act of 1934 by removing certain digital assets from classification as a security. This would save them from the SEC’s piercing and unforgiving glare.

The Act adds “digital token” to the Depression-era prolix that comprise U.S. securities laws. Digital tokens would escape the SEC’s policy-by-enforcement policy and avoid the accompanying soul-destroying, money-sucking investigations.  

Digital tokens would be a digital asset that is created:

 (i) in response to the verification or collection of proposed transactions;

(ii) pursuant to rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control; or

(iii) as an initial allocation of digital units that will otherwise be created in accordance with clause (i) or (ii);


(C) is capable of being traded or transferred between persons without an intermediate custodian; and

(D) is not a representation of a financial interest in a company, including an ownership or debt interest or revenue share.

It thus excludes security tokens representing ownership or a claim on company assets. According to the Blockchain Association the Act would “promote the open exchange of information and value and decrease the potential for fraud.” It’s a good first step, but it does not address a management-controlled utility token issued by a blockchain venture to incentivize platform use unless thereafter mined in a decentralized way.

The House and Senate would have to reconcile differences and president must sign before the Act became law. Even then, the benefits would be limited by SEC’s discretion in the regulation-making process. Heretofore the commission has proved inflexible and scattershot in its approach to the coming token-economy revolution.

Over the past two years, the SEC has been a model of obfuscation and inconsistency. Its policy announcement appear from nowhere without warning at conferences and media hits, sometimes by division-head careerists. This uncertainty is harming the industry and playing Russian roulette with the future of the US economy.

As one writer stated:

The SEC delivered some of its most important regulatory guidance of 2018 through conferences, interviews and personal statements. With each pronouncement, the SEC representative stated their views did not necessarily reflect the views of the SEC.

Looking back at the greatest hits, from “Every ICO I’ve seen is a security” to “If the network on which the token or coin is to function is sufficiently decentralized … the assets may not represent an investment contract” and “current offers and sales of ether are not securities transactions,” the SEC has not officially confirmed any of these statements and has instead clarified that staff views are non-binding and create no enforceable legal rights.

Bill Hinman, head of the Division of Corporation Finance answered—stated to great relief—he did not consider Ether a security at a San Francisco conference. Bravo, but SEC Chair Jay Clayton wouldn’t go that far in a widely viewed television interview last summer. Clayton would only state what everyone already knew: bitcoin isn’t a security.

Ether a security? Don’t ask the SEC Chair

What about “alt coins” Ether and Ripple? The Commissioner offered this bit of wisdom: “If it’s a security, we’re regulating it,” then repeatedly boasted about the prosperity of U.S. securities markets. But this is circular. The SEC regulates securities, it’s in the name. The question is where the boundaries are. If the best the SEC has is “we’ll just take it case by case,” it puts the future of the U.S. economy in jeopardy and Congress must step in. Case-by-case is fine if you’re a regulator. If you’re an entrepreneur or lawyer advising one it’s not so much fun to play mumblety-peg and wait for an SEC knock on the door. As one securities lawyer stated an SEC investigation is like “living in hell without dying.”

This scattershot method of delivering news to the “regulated community” has several drawbacks. First it breeds uncertainty in the markets as one article stated:

Instead of leading with hope, optimism and open-mindedness, the SEC has been instilling fear into the markets by issuing a series of mixed actions, publishing unclear statements and sending cryptic messages via occasional speeches. They have divided and conquered the blockchain industry by stringing its participants along, without sharing any form of original thinking.

Second, it puts the future of the token economy beyond the risk takers, entrepreneurs, and visionaries and into risk-averse turf protectors. The U.S. will not continue as the envy of the capital-forming world Mr. Clayton is so proud if entrepreneurs take their risk taking to Asia or Europe for more inviting regulatory environs.

The lack of straightforward and clear guidance also yields advantage to insiders at large law firms and former commission staff that have personal relationships and communication backchannels.  

Everyone should know the rules and Congress should make them. Elected officials are responsible to their constituents for jobs in their districts. Direction shouldn’t come from a huge federal agency and require a special course in tea leafing. Hopefully Congress and the president work together to quickly pass the Act.

By Jossey PLLC

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