Bipartisan bill would block digital tokens from becoming securities

Bipartisan legislation that would prevent digital tokens from being defined as securities is the latest congressional effort to shape regulation of cryptocurrencies.

Under the bill, the Securities Clarity Act, a digital token would be called an “investment contract asset” rather than a security, even if it is part of a securities offering, such as an initial coin offering.

“This new defined term would refer to any asset sold as part of an investment contract that would not be considered a ‘security’ but for its sale as part of an investment contract,” according to a statement about the bill released by its author, Rep. Tom Emmer, R-Minn.

The Securities and Exchange Commission has been wrestling with how to classify digital assets and whether securities laws can be applied to them. The agency has relied on a court ruling, SEC v. W.J. Howey Co., that many say doesn’t really sort things out when it comes to digital currencies.

“There has been an unreasonable approach by regulators as to how federal securities laws should be applied to transactions involving the sale of blockchain-based tokens, and this lack of clarity is hurting American innovation,” Emmer said in a statement when the bill was introduced on Thursday. “Between regulation by enforcement and the varying legal decisions regarding the classification of these assets, regulatory uncertainty has hindered the growth of blockchain technology, leaving many to take the technology overseas.”

The bill is co-sponsored by Reps. Darren Soto, D-Fla., and Ro Khanna, D-Calif., giving it bipartisan support out of the gate. Last week, Sen. Elizabeth Warren, D-Mass., pressed the SEC to clarify its authority to regulate cryptocurrency exchanges.

Capitol Hill likely must act given the murkiness surrounding digital currency oversight.

The SEC needs the legal framework that legislation could provide to define whether a cryptocurrency is a security, said Susan Schroeder, a former executive vice president and head of enforcement at the Financial Industry Regulatory Authority Inc.

“Clear guidance and direction from Congress is needed because the case law doesn’t fit cleanly into this cryptocurrency regime,” said Schroeder, a partner at the law firm WilmerHale. “Jurisdictional lines are blurred [between regulators]. That’s exactly when you need legislative leadership.”

Emmer’s bill doesn’t go far enough because it would apply to few kinds of digital tokens and would not provide enough to facilitate secondary market trading, said Alexander Kravets, chief executive of CEX.IO US, a cryptocurrency exchange.

“Ideally, regulators need to identify and create an overarching digital asset structure — what is or is not a security, commodity, or an ecosystem asset — how to apply the framework, how digital assets should trade, and so on,” Kravets wrote in an email through a spokeswoman. “That would spur immediate investment and innovation, as opposed to the current system where regulatory actions are a patchwork, either absent or draconian, and regulation is by legislative action and example — the ‘hang one guy and the rest scatter in fear’ approach.”

Earlier this week, the SEC charged the operator of Coinchedule.com, United Kingdom-based Blotics Ltd., with failing to disclose that it was paid to tout digital asset securities on the website.

Republican SEC Commissioners Hester Peirce and Elad Roisman agreed that the lack of disclosure was a violation of SEC rules. But they said the agency should have clarified which digital assets promoted on the website were securities.  

“There is a decided lack of clarity for market participants around the application of the securities laws to digital assets and their trading, as is evidenced by the requests each of us receives for clarity and the consistent outreach to the Commission staff for no-action and other relief,” Peirce and Roisman said in a statement.

Finra also weighed in on digital assets this week, reminding member brokerages that they must inform the regulator when their registered representatives or affiliates engage in activities involving cryptocurrencies – including those that are non-securities.

“It may be that Finra has some information that is causing concern,” Schroeder said. “It also is in Finra’s best interest to show that it’s active in this space.”