Regulatory clarity is what is cried out for by the crypto industry. In leaving the Securities and Exchange Commission (SEC) a set of arcane laws to create guidance regarding blockchain tokens, the default of ‘regulation by enforcement’ has left many entrepreneurs dissuaded about the ability to create and develop blockchain technology. Worse, the ultimate lack of action by all five SEC Commissioners , save of course the exception of ‘Crypto Mom’ Hester Peirce who is fiery in her dissent and a healthy reminder of the powerful role the late Supreme Court Justice Ruth Bader Ginsburg played, has left Congress no choice but to step in and take control of the train wreck that is the U.S. regulatory landscape for crypto.
Needless to say, it is a huge day in the world of crypto. First, Congressman Tom Emmer (R-NC) introduced the ‘Securities Clarity Act’ that makes a fundamental change to what an investment contract is and whether it can be treated as a security. In a brilliant idea, “The purpose of this Act is to clarify and codify that an asset sold pursuant to an investment contract, whether tangible or intangible (including an asset in digital form), that is not otherwise a security under the Act, does not become a security as a result of being sold or otherwise transferred pursuant to an investment contract”.
For Emmer, the fourth most powerful ranking Republican in the House of Representatives, Co-Chairman of the Congressional Blockchain Caucus, and Ranking Member of the Fintech Task Force, this bill brings with it some serious firepower from its sponsor. “We have seen regulations hinder the progress of blockchain-based technologies. The development of these vital technologies should not be impacted by government’s inability to adjust,” said Congressman Emmer.
Emmer further exclaimed, “The Securities Clarity Act will allow America to compete in this new advancing space without sacrificing the consumer and investor protections that have made our capital markets the strongest in the world. There are companies that have followed our current rules of the road and managed to navigate our securities regulations. Now, they deserve certainty from our regulators when offering their digital asset to the public.”
The full text of the Securities Clarity Act is here, and Emmer will certainly cement his legacy in the world of crypto and blockchain law, of which he has been a stalwart leader for some time now. Emmer first discussed the idea for this legislation last year at a hearing with Mark Zuckerberg, CEO of Facebook on the Libra Project.
“That’s why I intend to introduce a bill that will make it clear that as long as you register as a security or comply as an exemption under existing law, you will not continue to have prosecution hang over your head from a regulator when that asset is publicly distributed and in fact is a commodity,” said Emmer at the hearing in October 2019.
Lewis Cohen, co-founder of DLX Law, a ‘new type of law firm for a new type of economy’, shared his idea in a PowerPoint deck over a year ago with me after which I had the opportunity to introduce him to Emmer’s office. Landon Zinda, Legislative Director at Emmer’s office, has been entrenched in the policy of crypto and blockchain for a long time now and helped forge the concept into law as well as coordinate the different crypto trade groups in D.C. on their sign-off of the bill.
“This is the smartest approach we have seen to provide clarity about how securities law applies to digital assets. We applaud Rep. Emmer for his continued leadership on policy affecting cryptocurrency.” said Jerry Brito, Executive Director of Coin Center.
“We are proud to support this important legislation to help clarify the legal status of certain digital tokens, an issue that has significantly impacted the growth of the blockchain ecosystem in the United States. Digital tokens should not be deemed securities solely because they are the object or subject of an investment contract. It is critical that digital tokens have their own legal analysis as to whether they are securities, and we support Congressman Emmer’s effort to make that a reality.” said Amy Davine Kim, Chief Policy Officer for the Chamber of Digital Commerce.
“We’re proud to support the introduction of the Securities Clarity Act and the Digital Commodity Exchange Act. Together, these efforts will help clarify outstanding issues related to when and how securities laws and commodities regulations apply to digital assets. Uncertainty over the application of these rules of the road continues to act as a strong headwind for the crypto ecosystem. These bills would do much to clarify the situation and put into law pro-growth policies for the crypto economy.” said Kristin Smith, Executive Director of the Blockchain Association.
The Digital Commodity Exchange Act of 2020 is a companion bill to this concept that looks to sort out the crypto exchanges who offer the buying and selling of tokens that would fit into the definition provided by Emmer’s bill. The Digital Commodity Exchange Act of 2020 was sponsored by Congressman Mike Conaway (R-TX) and co-signed by three of the Co-Chairs of the Congressional Blockchain Caucus, including Emmer, Congressman Darren Soto (D-FL) and Congressman David Schweikert (R-AZ), and Congressman Dusty Johnson (R-SD).
Conway noted, “I’m excited by the support this bipartisan legislation has received in Congress and from those in the industry. I look forward to developing a legal framework and providing clarity for fintech innovators and strong protections for users of digital commodities.”
Conaway is the Ranking Member of the House Agricultural Committee and so is equally well-positioned as is Emmer to look for support to move the bill out of Committee. “The Digital Commodity Exchange Act (DCEA) provides a clear path forward to improve the regulation of digital commodities,” said Rep. Conaway.
Additionally, Conaway stated, “Digital commodity trading platforms are currently required to comply with a complicated labyrinth of 53 state and territory regulatory frameworks, hindering the ability for newcomers to enter the market. The DCEA provides responsible federal oversight of trading platforms and critical consumer protections, while also paving the way for innovators to develop new digital commodity projects.”
The bill would put all crypto exchanges under the purview of the Commodity Futures Trading Commission (CFTC). The bill specifically notes the concept of exclusive jurisdiction that would pre-empt state laws. “Notwithstanding any other provision of law, the Commission shall have exclusive jurisdiction over any agreement, contract, or transaction involving a contract of sale of any digital commodity in interstate commerce which is offered, solicited, traded, executed, or otherwise dealt in on or subject to the rules of a registered entity, including the conduct of any such office or business.”
However, this bill will likely receive pushback from states like New York and Wyoming, who have both carved out their own territory for crypto and blockchain regulation, with New York’s ‘BitLicense’ focused on protections of the consumer and Wyoming’s Special Purpose Depository Institution or ‘SPDI’ charter (pronounced SPDI) empowering crypto firms to become a bank. Neither will likely appreciate the idea of seeing hard work in carving out their own domains and expertise in the space taken away with ‘exclusive jurisdiction’ and just as the OCC’s first Special Purpose FinTech Charter was challenged in court, it is fair to expect potential challenges if this were to become law all the way to the Supreme Court.
This is all an extremely seismic shift in the way crypto exchanges and blockchain tokens will be overseen, should the bills pass. With the recent success of Soto in bringing the foundation for the Federal Trade Commission (FTC) to play the role of policing the frauds that can be perpetuated in token sales, this framework starts to look like regulatory clarity in the U.S. is within reach, even as soon as by the end of the year. Ultimately, the federal and state legislators truly need to find some kind of balance in the ecosystem that everyone can live with, because blockchain technology cannot live more longer in the United States based on the uncertain realm and high level of regulatory risks so many blockchain entrepreneurs face.