Encryption enthusiasts are carefully watching the progress of a draft bill from House Financial Services Committee Chair Patrick McHenry (R-NC) and Agriculture Committee Chair Glenn “GT” Thompson (R-PA), as it attempts to exempt cryptocurrency tokens from securities laws while keeping traditional securities issuers regulated. Among the supporters are former Commodities and Futures Trading Commission (CFTC) chair and current crypto advisor Christopher Giancarlo, who dubbed it a “landmark bill,” and Coinbase’s Chief Legal Officer Paul Grewal, who praised it as “a strong step forward.”
Despite the excitement, the draft raises questions. A central issue is whether tokens can be classified as investment contracts (and thus securities) under securities law; this is the focus of the Securities and Exchange Commission’s (SEC’s) lawsuits against Coinbase and Binance. The Howey Test, established by the SEC v. Howey Co. case in 1946, is used in determining what assets are securities. The test looks for investments of money in a common enterprise that investors expect to make a profit from through the efforts of others, but the SEC itself cannot dictate whether a token is a security.
The McHenry-Thompson draft bill proposes to create a new asset class: “digital assets,” notably defined as “digital commodities” and “restricted digital assets.” Restricted digital assets could be considered securities under the Howey Test but would be exempt from specific securities law provisions, pending six qualifications. This results in a more-lenient disclosure requirement for token issuances. Once these restricted digital assets become decentralized enough, they would be classified as digital commodities and exempt from securities laws.
However, the bill’s limitation that restricted digital assets cannot be equated with equity securities, debt securities, or debt securities convertible to equity interests is problematic. This provision may prevent regulatory arbitrage, but the bill does not define these terms. As a result, many digital assets governed by decentralized apps and decentralized autonomous organizations could be subject to traditional securities laws, as they grant the same rights as corporation stockholders.
Moreover, defining equity securities as only state-chartered legal entities could lead to companies converting themselves to fit this definition. The bill also faces issues with granting the CFTC new jurisdiction without additional funding and exempting DeFi exchanges from investor protection provisions required by CeFi exchanges. In addition, it grants the CFTC the power to retroactively or prospectively exempt sections of the digital commodity market from the bill’s customer protection provisions.
In conclusion, while the McHenry-Thompson bill aims to provide a way for crypto assets to evade securities laws, it demonstrates the impossibility of doing so without providing traditional securities issuers a method for avoiding these regulations as well. The bill’s challenges, including regulatory arbitrage, make it difficult to reconcile the crypto industry’s goals with the legislation and create new uncertainties for companies and investors alike.
Source: Coindesk
