Two members of the US House of Representatives have introduced bipartisan legislation that would provide regulatory guidance for cryptocurrencies and exclude them from being defined as a security under the law.
The Token Taxonomy Act seeks to “exclude digital tokens from the definition of a security,” and “to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography,” according to the text of the bill, which was introduced by Reps. Warren Davidson (R-Ohio) and Darren Soto (D-Florida).
The bill also calls for the adjustment of taxation of virtual currencies held in individual retirement accounts, and the creation of a tax exemption for exchanges of one virtual currency for another, among other provisions.
“In the early days of the internet, Congress passed legislation that provided certainty and resisted the temptation to over-regulate the market,” Davidson said in a statement. “Our intent is to achieve a similar win for America’s economy and for American leadership in this innovative space.”
The congressmen said the legislation “draws a bright line” for businesses and regulators by defining a “digital token” and clarifies that securities laws do not apply to companies that use blockchain once they reach their goal of becoming a functional network. They also said that implementing the bill will help stop the spread of fraud.
They argue that a “patchwork of judicial rulings and conflicting state initiatives” has clouded certainty for companies involved in this space and is motivating market players to leave the US for certainty provided in markets in other countries.
The bill is also intended to clarify the 1946 Supreme Court case SEC v. Howey that the SEC has been using to determine what is considered a security. The so-called “Howey Test” has been used to establish whether certain transactions qualify as “investment contracts.” If so, then under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and are therefore subject to certain disclosure and registration requirements.
According to the SEC, an investment contract exists if a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
In September, Davidson hosted a roundtable discussion with representatives from Wall Street, venture capital firms, and the cryptocurrency industry for input in drafting the legislation. Davidson has criticized the regulatory framework in the cryptocurrency space as “sloppy”.
“While this legislation is a great first step, we are looking for feedback,” said Soto in a statement. “The Federal Trade Commission (FTC) has a history of policing web services, while the Commodities Futures Trading Commission (CFTC) has authority over commodity derivatives. To what extent does the jurisdiction of the FTC apply to digital tokens? Can we address this issue in this legislation or will we need subsequent legislation to effectively regulate this emerging sector?”