L Higgins and M Bacina
Jun 8, 20233 min
House Republicans in the US Congress have introduced a draft bill aimed at providing more clarity and flexibility for digital tokens in the US. The bill, released by House Financial Services Committee Chair Patrick McHenry and House Agriculture Committee Chair Glenn Thompson, seeks to address the treatment of digital assets in the US under existing financial laws and to accommodate the unique characteristics of blockchain-based tokens.
One significant provision in the bill is the establishment of a clear definition for determining when a project is decentralised enough to no longer be considered an ‘investment contract’ under US securities law. This has long been a contentious issue for crypto projects operating in the region.
McHenry and Thompson hope that this draft bill will serve as a starting point for negotiations with House Democrats and Senate counterparts. They intend for it to advance discussions rather than it being a definitive document. The reception from other policymakers and the Biden administration will play a crucial role in determining the bill's prospects for passage. Last year, US financial regulators, led by Treasury Secretary Janet Yellen, called for new legislation regarding digital assets.
In addition to engaging with House members, staff of the Financial Services Committee have been in contact with several senators who are actively involved in crypto legislation and aim to lay the groundwork for passage in both chambers of Congress. This outreach includes communication with staff from the Senate Agriculture Committee, Senate Banking Committee, and other senators with significant involvement in digital asset regulation.
While traditional securities like stocks and bonds require disclosure documents, proponents of digital assets argue that these laws should not apply to them. However, the SEC has been extremely active in recent times (see for example the SEC's recent activities regarding Bittrex and Coinbase).
The legislation being negotiated in the House of Representatives aims to establish a more stable and investor-friendly market structure for digital assets in the US. It also seeks to address concerns that current securities laws may be too rigid for promising crypto projects.
One notable aspect of the bill is the definition it provides for the concept of a decentralised network. If a token operates within such a network, it could transition under US law from being treated as a security as a commodity, subject to lower disclosure requirements in the US and dividing the regulatory approach between the SEC (for securities) and the CFTC (for commodities).
Under the current language of the bill, a network would be considered decentralised if, for at least a year:
no individual had control, no issuer or decentralised organization owned more than 20% of the tokens; and
no marketing or issuance occurred in the three months before certification.
Token issuances within 12 months would also need to be directed to end users only.
Private sales of tokens for capital raising would still be allowed, following the same framework as private securities offerings. The determination of whether a project qualifies as decentralised would be made by the federal market regulators (i.e. the SEC and the CFTC). If a project becomes recentralised, the SEC could revoke the determination.
Although the bill is not seen as comprehensive as EU’s MiCA regime (nor does it seem to intend to be), industry members are pleased with the Senators’ efforts. Delphi Lab's General Counsel Gabriel Shapiro said:
[the draft bill is] a good faith, diligent informed effort to make crypto work on its own terms within the U.S.'s incredibly byzantine & otherwise incompatible financial regulatory environment...it's probably our best hope
If the bill is enacted, most trading platforms for tokens would finally have a path they could follow to become registered in the US as "Alternative Trading Systems" with the SEC. Payment stablecoins would be exempt from securities designation, and additional legislation has been proposed to establish a comprehensive framework for this class of digital assets by McHenry and other senators. This move is a needed positive step forward given recent global industry events and enforcement actions and while it faces a divided US Congress it may, as Mr Shapiro said, be the best hope of the US crypto industry.