Cryptocurrencies are just a fad according to many, and downright dangerous according to some, but they could represent the first change to securities law in almost ninety years if two US congressmen get their way. The Token Taxonomy Act, a bipartisan bill put forward by Republican Warren Davidson and Democrat Darren Soto, seeks to separate digital assets from existing securities and instead create a legal definition of ‘digital tokens’, a move that would see the first amendments to securities laws since the 1940s:
To amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for an-other, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.
The Howey Test
The existing acts utilize the Howey test, created in 1946, to determine whether assets are securities or not. Many argue that this test is not suitable for cryptocurrencies given that they straddle at least one defining criteria, which leaves them open to too much interpretation. Separating digital assets from other securities would allow a more appropriate test to be created in line with existing securities law, making the jobs of the SEC, judges, and crypto project leaders easier. Given that the bill was submitted to close to the end of the year it will now be heard in 2019, and it will be interesting to see if its discussion has any impact on the upcoming Bitcoin ETF decision in February.
Good News for ICOs
Some more good news came via the SEC earlier in the week when Valerie A. Szczepanik, new Senior Advisor for Digital Assets and Innovation, told a gathering hosted by the Wall Street Blockchain Alliance in New York that new ICOs could essentially bypass US securities registration requirements by obtaining a ‘no action’ letter from the SEC. These letters, Szczepanik said, would negate the need to go through the lengthy securities registration or exclusion process, but would instead ‘recommend no enforcement action’ if the SEC felt comfortable that investors were being protected.
These small crumbs of flexibility speak to a potentially more welcoming attitude from the SEC going into 2019, and a desire to allow innovation to flourish while protecting consumers at the same time.