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US Lawmakers Proposing a Bill to Challenge SEC’s Definition of Crypto as Securities

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by Teuta Franjkovic · 6 min read
US Lawmakers Proposing a Bill to Challenge SEC’s Definition of Crypto as Securities
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Two U.S. congressmen Warren Davidson and Darren Soto, are introducing a bill that would exclude digital currencies from securities classification and substantially improve the tax treatment for cryptocurrencies.

The new definition could benefit current cryptocurrency projects (such is Ripple’s XRP) and allow for ICOs and STOs to fundraise with more clarity.

What actually happened is that in November, a federal Judge Raymond Dearie has ruled that Initial Coin Offerings (ICOs) are under the United States securities laws.

The judge made this ruling during the court hearing of Maksim Zaslavskiy’s case who was charged in February for allegedly being involved in two fraudulent ICOs.

The allegations against the defendant state that he told investors that the tokens had the backings of real estate and diamonds which the prosecutors have denied.

In self-defense, Zaslavskiy stated that the tokens were not securities, putting of a claim that the existing securities laws were “unconstitutionally vague.”

Dearie then said:

“Per the indictment, no diamonds or real estate, or any coins, tokens, or currency of any imaginable sort, ever existed, despite promises made to investors to the contrary.”

According to judge, because an investment opportunity is termed a “virtual currency or “cryptocurrency” doesn’t automatically convert such investment – security – into a currency.

Now, Davidson and Soto are looking to change that with the ”Token Taxonomy Act,” a bipartisan bill being introduced to the House. This would amend the Securities Exchange Act, which established the current structure for what a security is, and adds a new definition for “digital tokens.”

Blockchain lobbyist Kristin Smith said that these decentralized networks don’t fit neatly within the existing regulatory structure.

“This is a step forward in finding the right way to regulate them. Like all legislation in the early stages, we expect this bill isn’t perfect yet. However, what excites us is that it was proposed by a bipartisan team, demonstrating a vision for innovation and responsibility that is shared across the aisle. 

We want to work together to debate the key issues, ensure adequate consumer protection, and work toward advancing legislation that represents our collective views.”

This move comes after talk ramped up regarding XRP’s status in the regulatory realm, as rumors have hinted that Ripple’s go-to asset will be listed on Coinbase if XRP is formally classified as a non-security.

Experts: Standards Should be More Nuanced for Digital Assets

In his statement, Davidson said:

“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.”

What the Securities and Exchange Commission uses now is something that’s known as the “Howey Test,” that comes from a 1946 U.S. Supreme Court decision involving a Floridian citrus farmer to determine whether or not a cryptocurrency is a security.

The Supreme Court determined that any transactions that qualify as “investment contracts” are considered securities. According to the SEC, an investment contract exists if “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.”

Experts now say those standards should be more nuanced for digital assets. James Foust, a senior research fellow at the digital currency technology-focused nonprofit Coin Center wrote:

“Although the SEC has put forth sensible guidance on this question, codifying that decentralized cryptocurrencies are not securities would mitigate any lingering uncertainty.”

Just for a reminder, two weeks ago, Davidson announced his plans to introduce new legislation in the house. This announcement was reported on a local Ohio news agency, The announcement actually came at a four-day blockchain conference in Cleveland and the Ethereum co-founder, Joseph Lubin, was also in attendance.

The newly proposed bill now calls to:

“… direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for an-other, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.”

The bill includes other crypto-friendly measures as well, including parts that focus on the tax implications of buying, selling or using cryptocurrencies.

It also states:

“The amount of gain excluded from gross income under subsection (a) with respect to a sale or exchange of virtual currency shall not exceed $600.”

Just two days after Davidson, on 8th of December, congressmen Darren Soto and Ted Budd have introduced the bills that direct the CFTC and other financial regulators to make recommendations for how to improve the crypto regulatory environment for both consumers and businesses.

The two bills take into account the lack of clarity in providing a regulatory framework for cryptocurrency and direct regulatory bodies to have a comprehensive system in place for both the consumers and enterprises. The main aim of the bill is to minimize the chances of price manipulation in wake of the Attorney General’s report which highlighted the risk of price manipulation.

Cynics are Sceptical But There is Significant Support for the New Bill

The SEC has already cracked down numerous cryptocurrency projects this year. Some ICOs have been proven to be outright frauds, others have been prosecuted for less egregious violations, like not registering with the agency. Since 2017, the SEC has issued actions against the DAO, Munchee, EtherDelta, Paragon and Airfox, and DJ Khaled and Floyd Mayweather.

These enforcement actions have clarified some, but not all, of the issues surrounding securities classification for cryptocurrencies.

The bill follows a Congressional “crypto roundtable” held by Davidson in September. Over 45 representatives from major Wall Street firms and crypto companies told lawmakers that there is a pronounced lack of regulatory clarity for initial coin offerings (ICOs) and digital currencies, while some participants argued that current regulations were not only vague, but outdated.

And while sceptics don’t believe that this act will succeed, the joint effort from Davidson and Soto likely already have the support from a number of fellow congressmen. Colorado’s Jared Polis and California’s Gavin Newsom, two forward-minded, pro-Bitcoin politicians, were elected into office in America’s most recent midterms, which were finalized in early-November. Newsom was one of the world’s first political incumbents to accept Bitcoin donations, while Polis actively heads pro-blockchain efforts.

If the Token Taxonomy Act passes, cryptos will no longer be considered securities on the same basis as used on stocks. As such, SEC would need to amend its policies to incorporate a new separate definition for digital tokens.

However, with the bill only introduced on Thursday and Friday is the last day of the Congress, the Reps will still need to reintroduce the bill next year while the whole crypto community will support the movement and hope that it is successful.

During the last few years, governments around the world have been imposing new regulations on the market. Countries such as Japan or Thailand have been working in order to provide clear information to investors and companies in the market. It’s let to see if the United States will succeed in finding better regulatory frameworks for the future.

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