Thursday, December 20th, two members of US Congress introduced a bill that would exclude cryptocurrencies from the definition of security. If approved, this would totally change the SEC’s regulation on the definition of securities.
This “Token Taxonomy Act“, proposed by Warren Davidson, R-Ohio and Darren Soto, D-Fla, defines the meaning of digital tokens and clarifies once and for all that the regulation of securities should not and cannot be applied to crypto, especially decentralised ones.
“In the early days of the internet, Congress passed legislation that provided certainty and resisted the temptation to over-regulate the market. Our intent is to achieve a similar win for America’s economy and for American leadership in this innovative space.”
The definition of security
In 1946, the SEC created what is now known as the Howey Test, which defined under what circumstances to consider an asset as security or not.
The definition can be translated into an “investment contract” that exists in the case a person “invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party“.
Cryptocurrencies – for their design – do not need intermediaries in most cases and can be traded without a central body like the Nasdaq in the case of the stock exchange. This makes the definition of security inapplicable, which instead makes explicit reference to the presence of a promoter and a third party involved.
“These decentralised networks don’t fit neatly within the existing regulatory structure,” said Kristin Smith, head of the Blockchain Association. “This is a step forward in finding the right way to regulate them”.
Security, utility or payment tokens?
In the world, and even within America itself, it is not yet clear what definition cryptocurrencies should be given in general.
In June, SEC President Jay Clayton announced his intention of not wanting to modify the standards in order to adapt them to the crypto world.
At the same time, however, another member of the SEC stated by saying that neither bitcoin (BTC) nor ethereum (ETH) are securities because of their decentralised nature. On the contrary, ICOs could still be defined as such.
So, while the SEC has said its own, it is now the turn of Congress to actually have the power to amend this 72-year-old law.
If the bill passed, Smith explained that it would not mean that crypto would not be regulated, but that it would probably come under the direct control of the Federal Trade Commission or the CFTC.
This proposal would also reflect on the taxation of cryptocurrencies, creating an exemption for any capital gains.
Probably, even ICOs will not be defined as securities, because of the “utility” of some tokens: consequently, they could be defined as commodities instead and therefore regulated by the CFTC.