Calls for more clarity on cryptocurrency regulation are now coming from Congress, not just bitcoin fanatics.
clarify that bitcoin and ether are commodities, regulated by the CFTC. But for thousands of others created through initial coin offerings, the agency uses a yardstick known as the “Howey Test.” The rule comes from a 1946 U.S. Supreme Court decision.
Chairman Clayton has made it clear that he does not intend to update those standards for crypto. As an independent agency, the SEC can give clarity on existing laws but cannot change them without an act of Congress. This letter leaves the door open to that.
Last week, Rep. Tom Emmer, R-Minn., said he plans to introduced three crypto and blockchain friendly bills, while Rep. Warren Davidson, R-Ohio, is drafting one to be introduced this fall that he says not yet “fully cooked.”
Friday’s letter echoed a chief concern from crypto industry stakeholders: Lack of clarity could cause innovation to flee overseas.
“Current uncertainty surrounding the treatment of offers and sales of digital tokens is hindering innovation in the United States and will ultimately drive business elsewhere,” the letter said. “We believe that the SEC could do more to clarify its position.”
The letter comes on the back of a four-hour meeting on Capitol Hill this week, attended by representatives from Wall Street, venture capital, and cryptocurrency firms. Among the roughly 50 participants present were Fidelity, Nasdaq, State Street, Andreessen Horowitz, and the U.S. Chamber of Commerce.
“We all want fair and orderly markets, we want all the same things regulators do,” said Mike Lempres, chief policy officer at San Francisco-based Coinbase said during the meeting. “It doesn’t have to be done in the same way it was done in the past, and we need to be open to that.”
In the letter, lawmakers admonished the idea of using punishment as way to tell the industry where they stand.
“We are concerned about the use of enforcement actions alone to clarify policy and believe that formal guidance may be an appropriate approach to clearing up legal uncertainties which are causing the environment for the development of innovative technologies in the United States to be unnecessarily fraught,” the letter said.
The agency has cracked down on frauds in initial coin offerings, or ICOs, since bitcoin’s epic rise to almost $20,000 at the end of last year. ICO fundraising has brought in $12 billion this year alone, according to data from Autonomous Next. Consumer protection has been a focus for the agency and while some ICOs have been proven to be outright frauds, others have been prosecuted for less egregious violations, like not registering with the SEC.
The letter was an effort from both sides of the aisle, and was lead by Rep. Ted Budd, R-N.C., Reps. Emmer and Davidson, as well Darren Soto, D-Fla. In addition, David Schweikert, R-Ariz., Jeff Duncan, R- S.C., Alex Mooney, R- W.V., John Curtis, R-Utah, Ralph Norman, R- S.C., Andy Biggs, R-Ariz., Mark Meadows, R-N.C., Derek Kilmer, D-Wash., Greg Gianforte, R-Mont., and Sean Duffy, R-WI, were among the signatories.
The group did not give a deadline for a SEC response but urged the agency to “be mindful of the speed at which the industry is developing.”
Here are some requests from Congress:
1. The SEC should clarify the criteria used to determine when offers and sales of digital tokens should properly be considered “investment contracts” and therefore offerings of securities.
The public statements made by yourself, Commissioner Peirce, and Director Hinman are helpful indicia of the evolution of the SEC’s views of digital token platforms. Please expand on what criteria the SEC is currently using – specific to digital tokens- to determine under what circumstances the offer and sale of a digital token should properly be considered an “investment contract,” and therefore, and offer or sale of “securities” under the Securities Acts and the Howey Test.
The various criteria set out at the end of Director Hinman’s speech are helpful; nevertheless, specific FAQ-type examples illustrating how these factors may be applied in practice could aid market participants in better understanding how these factors should be applied.
The marketplace for digital tokens is expanding. Other digital tokens in existence today should also be deemed to fall outside the parameters used to define an investment contract under the securities laws. In the current environment it is unclear which other unique characteristics of digital tokens are also considered by the SEC when making this determination.
2. Do you agree that a token originally sold in an investment contract can, nonetheless, be a non-security as Mr. Hinman stated? Can the resultant token be analyzed separately from the original purchase agreement, which may clearly be an investment contract? And, if so, could the resultant token, nonetheless be a non-security?
3. Please describe the tools available to the SEC to offer more concrete guidance to innovators on these topics.