US Lawmaker Reintroduces ‘Safe Harbor’ Crypto Tax Bill In Congress (#GotBitcoin?)
United States Congressman Tom Emmer has reintroduced his Safe Harbor for Taxpayers with Forked Assets bill, according to a press release published July 9. US Lawmaker Reintroduces ‘Safe Harbor’ Crypto Tax Bill In Congress (#GotBitcoin?)
The reintroduced version of the bill appears to have been published on July 3, based on the date printed within the document.
Emmer initially announced plans for the Forked Assets bill in 2018 as a means to simplify tax laws pertaining to assets held on blockchains with hard forks.
A hard fork on a blockchain splits the chain in two, with one path following the original protocol and another path diverging with different features. The new path is incompatible with the original blockchain, and does not regard its previously ratified transactions as valid.
Emmer purportedly introduced the bill in order to foster blockchain industry growth in the U.S. by lessening the burden on businesses to figure out relevant tax laws. In Emmer’s own words, “taxpayers can only comply with the law when the law is clear.”
Worth noting is that The Safe Harbor bill is not intended to eliminate taxes on a hard forked blockchain. Instead, the bill aims to provide a safe harbor to investors who don’t properly account for a hard fork in calculating their tax returns.
As previously reported by Cointelegraph, Congressman Emmer also recently reintroduced the bill to “provide a safe harbor from licensing and registration for certain non-controlling blockchain developers and providers of blockchain services” in January.
In April, Congress representatives Warren Davidson and Darren Soto — a co-sponsor of the foregoing licensing and registration bill — moved to reintroduce the Token Taxonomy Act. This bill would exclude cryptocurrencies from security regulations, and would similarly aim to simultaneously clarify and simplify regulatory compliance for blockchain-based businesses.
Rep. Warren Davidson: You Have To Defend Money To Defend Freedom
In an interview with Cointelegraph on Friday, Oct. 18, United States Representative Warren Davidson gave his thoughts on the Securities Exchange Commission’s (SEC) flawed approach to regulating digital assets as well as Mark Zuckerberg’s upcoming Oct. 23 testimony before the House Financial Services Committee.
Congressman Davidson (R-OH) is a figure familiar to many in the crypto world for his role in authoring the Token Taxonomy Act, as well as his general optimism about the role of blockchain in the U.S.
On Regulating Libra As A Security
While Discussing Regulating Cryptocurrencies At Large As Opposed To Libra, Davidson Was Highly Precise In His Taxonomic Definitions:
“We use the term ‘cryptocurrencies’ to refer to everything in the crypto space, which is sloppy language. What we need to focus on is, what is Libra’s goal? Its goal is to be a currency. Let’s not conflate that with what other things in the space want to do and how we regulate them. How we look at Libra would be to apply, in my view, the Token Taxonomy litmus test.”
Davidson concluded that Libra is ultimately classified as a security, and therefore falls under the purview of the SEC within the United States. He explained this as being a function of the influence of a central organization over Libra’s composition. It was originally planned as a “basket” of currencies, though David Marcus, head of Calibra, yesterday suggested that these could instead be fiat-pegged stablecoins.
Speaking about Libra’s classification as a security, Davidson said, “It has nothing to do with stablecoins. It has to do with whether there’s a central authority that can alter it.” The congressman was unconvinced that the planned basket of currencies would be fixed and stable, opening Libra up to the Libra Association’s tampering. He ceded that SEC Chairman Clayton is correct in his assessment as to how this makes Libra a security, rather than a true currency.
“It’s the ability to destroy your value,” Davidson said. “And in that sense, when you’re placing all your faith in the value of that token on the actions of a central authority, that’s where I tend to agree with Jay Clayton. That looks a lot like a security.”
Elaborating on Libra’s centralization, Davidson said, “The way that they proposed to do it — and the fact that it’s Facebook doing it — highlights to me the problem with centralized tokens.” Bitcoin (BTC) came up as a comparison: “Whoever Satoshi Nakamoto is, you can’t serve Satoshi papers. There’s no headquarters to subpoena.”
Davidson did credit Facebook’s initial whitepaper for Libra with a rapid expansion of interest in crypto:
“It was the moment that I think a lot people said, ‘Wow this is really gonna be a thing, it’s not just this wonky niche.’ Facebook’s talking about doing it all over the planet, this is going to scale up. It really raised the profile of blockchain. I think that’s great.”
On The Sec’s “Third-World” Approach To Crypto: Regulation By Enforcement
Despite his desire to see Libra under the SEC’s jurisdiction, Davidson was extremely critical of the commission’s current regulation of digital assets. The present strategy has largely consisted of legal action against companies making moves that the SEC deems missteps:
“The SEC is doing a complete patchwork of regulation. No one knows where they’re going. They’re literally told if you want to launch a token, whatever you think you want to do with it, come check with the SEC first. […] And you can grovel. If you grovel well enough, then we’ll give you a no-action letter. You have hundreds of companies waiting on no-action letters. They’ve approved two. You can’t raise capital while you’re waiting for that.”
Telegram recently made a similar argument in response to the SEC’s emergency action against the company’s distribution of Gram tokens on Oct. 11. Telegram alleged that the commission had ended up facing an “emergency of its own making” by not doing anything in the 18 preceding months during which it was aware of Telegram’s plans.
Davidson blamed this strategy for a flight of capital from the U.S. to other countries. In the case of the Libra Association, that money’s going to Geneva. This move drew the ire of Davidson’s fellow committee members when David Marcus spoke to them in July. To Davidson, this is a search for clarity rather than anarchy:
“So what are people doing? They’re like,’Screw you guys, we’re just gonna launch it in Switzerland, Singapore, Malta — wherever.’ And they’re not going to avoid our laws — we don’t have a law. As I told Chairman Clayton, you’ve got all the charm and inefficiency of third-world power structures. Go see el jefe and maybe you can cut your own deal. That’s a horrible way to regulate the economy. You do not regulate by enforcement. You regulate by passing a simple law as a uniform standard for everyone. That’s easy to comply with. That’s what first-world countries do.”
After the SEC hearing, Cointelegraph asked whether the next steps were in the hands of legislators in Congress or regulators like the SEC. Congressman Davidson came down on the side of legislation first.
The congressman attributed the current hold-up to the mechanics of how the SEC’s commissioners operate: “They’re having a debate internal to the board as to how to go forward. And frankly, part of the holdback is Chairman Clayton. He’s got a lot of power and he doesn’t want to give it up.”
It remains to be seen how recent events will or won’t compel other members of Congress to back the Token Taxonomy Act (or any equivalent piece of legislation). On a more optimistic note, Davidson expressed continuing hope for the future of blockchain and crypto in the United States: “I believe that this is a great industry. America should be leading the world in it, we should set our framework for it.”
On His Hopes For The Oct. 23 Committee Hearing With Mark Zuckerberg
With Davidson’s views on Libra’s status as a security established, he elaborated on what he wants to see at Wednesday’s hearing. He seemed to prefer that the hearings stick to the subject of Libra rather than reining in the company as a whole: “Hopefully it focuses on blockchain and this tokenized idea that they have versus just Facebook.”
A major concern for Davidson is the degree of control that Libra and the associated Calibra wallet will have over transactions. In his words: “Some people want the wallets to filter transactions. I don’t know. I’ve got a wallet. Does your wallet filter transactions? Does your wallet say, ‘No, you can’t buy that?’” He continued:
“Would Libra itself — which is supposed to be a store of value, money, a currency, a synthetic currency, basically — would the association have any way to filter transactions? And if they do, then it’s not really money, it’s a system of control.”
In no uncertain terms, the congressman asserted his opposition to that kind of control of consumer finances: “It’s a civil liberties thing. If you’re going to defend freedom, you have to defend money.”
Bill To Exempt Small Crypto Transactions From Taxes Returns To US Congress
A bill seeking to exempt personal cryptocurrency transactions from taxation for capital gains has been reintroduced in the Congress of the United States.
What The Bill Looks To Change
Called “The Virtual Currency Tax Fairness Act of 2020,” the bill would establish an exemption for virtual currency expenditures that qualify as personal transactions. Users would then not have to report instances when they spent crypto whose valued had changed relative to the U.S. dollar on day-to-day expenses.
Representatives Suzan DelBene (D-WA) and David Schweikert (R-AZ) introduced the bill today, Jan. 16. Schweikert introduced an earlier version of this bill in 2017 that featured a substantially larger exemption.
Existing tax law struggles to cope with cryptocurrencies, as they sometimes behave as investments, sometimes commodities, and sometimes just like other currencies. It is to this last type of transaction that the bill looks to simplify for crypto traders and users.
The Current Problem And The Earlier Bill
Currently, the IRS could hold crypto users responsible for paying taxes on gains earned and realized unknowingly, based solely on the value of their crypto at a time of purchase. Such a system would make use of crypto as currency incredibly cumbersome within the U.S.
The newly reintroduced bill would exempt taxpayers from a reporting duty as long as the gains involved are under $200, which would generally only apply with major purchases or wild bull markets. The earlier version of the bill put this number at $600.
The bill would insert a new category within existing IRS exclusions from classification as gross income.
Other Issues With U.S. Taxation
Taxing cryptocurrencies has proved a major sticking point in the U.S. In December, eight congresspeople sent a letter to the IRS asking the tax agency to clarify rules for reporting income due to hard forks or air drops.
Last year, just before the tax reporting deadline in April, 21 representatives sent a similar letter to the IRS, likewise dissatisfied with current clarity.
Top 10 Congresspeople Working On Crypto Policy
Following a year that has seen unprecedented interactions between United States legislators and the crypto industry, Cointelegraph has compiled a roster of congresspeople who have established stances and policies for blockchain and cryptocurrency that will shape the future of the industry within the country.
Some of the congresspeople listed are bullish on blockchain, while some have established clear opposition to topics like Facebook’s Libra or other cryptocurrencies, but Cointelegraph believes that all of them are worth watching in 2020.
Rep. Tom Emmer (R-MN)
As ranking member of the Fintech Task Force as well as holding positions within the Blockchain Caucus and the House Financial Services Committee, Rep. Emmer has established a clear interest in encouraging comprehensive regulation for crypto.
Emmer has been particularly engaged in the process of providing clear rules on cryptocurrency taxation. His proposed Safe Harbor bill aims to protect crypto owners from pursuit by the Internal Revenue Service for failure to correctly report assets owned on blockchains that have experienced a hard fork. More recently, Emmer and seven other representatives (two of which are listed below) sent a letter to the commissioner of the IRS asking to clarify similar issues for taxpayers following the agency’s October guidance to crypto holders.
Rep. Warren Davidson (R-OH)
Rep. Davidson is a notable ally of the crypto community. He is one of two authors of the Token Taxonomy Act, which he reintroduced in April. The bill came in good time, as its precepts could end up determining which regulatory agency handles Facebook’s Libra, the white paper for which was released in June.
In addition to his work pressing forward with a coherent classification system for tokens, Davidson also holds a seat on the Fintech Task Force and is vocal at congressional hearings on his faith in blockchain’s ability to mitigate risks to data privacy.
Rep. Darren Soto (D-FL)
Alongside Davidson, Rep. Soto co-authored and co-sponsored the Token Taxonomy Act. In January, he was also named a co-chair of the Congressional Blockchain Caucus. In his position, he has advocated keeping regulation of most cryptocurrencies within the purview of the Commodities Futures Trading Commission rather than the more demanding Securities Exchange Commission. In January, he also introduced two resolutions seeking to examine virtual currency markets for fairness and competitiveness.
Soto has displayed a broader interest in regulating emerging technologies with promise for the economy. The same month he joined the Blockchain Caucus, he introduced a bill for managing the impact of artificial intelligence on the workforce.
Rep. Paul Gosar (R-AZ)
A surprise addition to the list, Rep. Gosar had little notable interaction with the crypto sphere until his Dec. 19 introduction of a discussion draft of the Crypto-Currency Act of 2020.
Like the older Token Taxonomy Act, the current draft of Gosar’s bill seeks to establish a comprehensive means of defining different digital assets, but this one proposes three classifications: crypto commodities, crypto currencies and crypto securities. Each would face a different regulatory program. Despite this being Gosar’s first legislative addition into the space, the move has positioned him as a person of interest for everyone watching crypto legislation in 2020.
Sen. Catherine Cortez Masto (D-NV)
If this list seems heavy on the House of Representatives, it’s only fair. Not only are there far more representatives than senators — currently, 435 to 100 — but representatives face re-election every two years compared to six for senators, making the House the more dynamic body of the two. Consequently, changes in technology generally receive more attention from representatives, who can be more reactive to new issues and have more incentive to distinguish themselves from their colleagues.
That said, Senator Catherine Cortez Masto is a notable figure in crypto legislation. She is the author of the FIND Trafficking Act that requires the Comptroller General of the U.S. to conduct a comprehensive study on dark web marketplaces and use of crypto in drug sales and human trafficking, the responsibility for which is currently with the Senate Banking Committee, on which Cortez Masto holds a seat.
From her position on the Banking Committee, Cortez Masto has proven to be a singularly positive voice during hearings on blockchain-related affairs. At one hearing back in August 2018, she said, “I do believe we are at the dawn of a new age with the potential for blockchain technology and we cannot squander it.” She doubled down on the sentiment at a hearing featuring cryptocurrency experts in July, stating:
“It’s a platform that has the ability to transform so many sectors of this country from, what we are talking about right now — the financial sector, to the energy sector, to healthcare records, to everything. I think there’s potential here and it’s not going to go away. It is something we will have to address because if we, as a country, do not lead in this technology, China or some other country is going to do so.”
Rep. Brad Sherman (D-CA)
Not all congresspeople to watch for are crypto advocates. Representative Brad Sherman sits on the same House Financial Services Committee as many of the other politicians on this list, but he distinguishes himself by his resolute opposition to cryptocurrency as a whole, making him a figure worth keeping an eye on, especially given his new position as chair of the Subcommittee on Investor Protection.
In May, Sherman Called For A Comprehensive Ban On Crypto, Saying:
“An awful lot of our international power stems from the fact that the dollar is the standard unit of international finance and transactions […] it is the announced purpose of the supporters of cryptocurrencies to take that power away from us.”
Hearings before the Financial Services Committee on the subject of Facebook’s proposed Libra stablecoin did nothing to placate Sherman, who doubled down on his opposition to crypto by tweeting that “Mark Zuckerberg is sending a Friend Request to Oligarchs, Drug Dealers, Human Traffickers, and Terrorists.”
Rep. Maxine Waters (D-CA)
As Chairwoman of the House Financial Services Committee, Rep. Maxine Waters wields broad powers over the process of legislating the financial world. It was her request for a moratorium on Libra’s development back in June that set the scene for a summer of hearings (one with David Marcus and another with Mark Zuckerberg) on the subject, all of which happened under Waters’ purview.
Chairwoman Waters has a reputation for her opposition to crypto, which makes her something of a boogieman to the crypto community, given her status in Congress. Despite her unequivocal suspicion for Libra, however, Waters is responsible for legislation such as the United States Export Finance Agency Act of 2019. Introduced three days after Waters’ call for a moratorium on Libra, the bill includes provisions to explore blockchain as a means of streamlining exporter operations, complicating her relationship to the space.
Sen. Todd Young (R-IN)
Senator Todd Young is most notable for his authorship of the Blockchain Promotion Act of 2019. A similar bill appeared in the House Energy and Commerce Committee under the auspices of Representative Doris Matsui, but the Senate version earns Young top billing for two reasons. Firstly, there is much less legislative action in blockchain from the Senate side, and secondly, Young’s version in the Senate has already been met with a round of revisions and gotten a place on the legislative calendar. In the House, the bill remains in committee.
The basic push of the Blockchain Promotion Act is, in its own words, “to establish a working group to recommend to Congress a definition of blockchain technology.” Such a working group would ideally streamline future legislation on the subject. Upon introducing the bill, Young tweeted:
“Blockchain is the bedrock of modern cryptocurrencies and could have a huge impact in nonfinancial industries like supply chain management, cybersecurity, AI & healthcare. I just intro’d a bill to ensure the U.S. is at the forefront of this technology”
Rep. Bill Foster (D-IL)
A former particle physicist, theatrical lighting entrepreneur and likely the only blockchain programmer in Congress, Representative Bill Foster has consistently brought unique technical expertise to the conversation on legislating cryptocurrencies.
Moreover, Foster holds a seat on the Congressional Blockchain Caucus, was another co-signatory to the recent letter to the IRS, and, alongside Rep. French Hill, wrote a letter to the Federal Reserve inquiring on the prospects for a digital dollar.
Sen. Mike Crapo (R-ID)
While Senator Mike Crapo has not been particularly active in drafting legislation to regulate cryptocurrencies, this year saw him thrust into the spotlight, largely thanks to his role as Chairman of the Senate Banking Committee. Alongside ranking member Sherrod Brown, Crapo took center stage during hearings on blockchain throughout this summer. Unlike Brown, he seemed invested in supporting the U.S.’s initiative in the field.
At A July Hearing Before The Banking Committee Featuring Three Experts On Blockchain And Crypto, Crapo Commented:
“I want the U.S. to stay at the forefront of this technology, which both has incredible potential and incredible risk.”
Crapo’s concerns about innovation were also reflected in his commentary following the hearing with David Marcus on Libra. Facebook, for one, clearly saw Crapo’s favor as essential. Just weeks after the hearing, the social media giant hired a former staffer from Crapo’s office as a lobbyist for Libra.
Rep. Sylvia Garcia
Another dark horse on this list, Representative Sylvia Garcia had remained fairly quiet on the crypto front until he authored a draft bill on managed stablecoins, which appeared on the eve of Mark Zuckerberg’s appearance before the House Financial Services Committee and was later introduced at the end of November.
While certainly less comprehensive than Davidson and Soto’s Token Taxonomy Act or Gosar’s Crypto-Currency Act, Garcia’s Managed Stablecoins are Securities Act of 2019 incorporates the familiar classification that would leave managed stablecoins under the purview of the Securities and Exchange Commission. The logic is that a company managing such stablecoins can alter their composition, which means that the SEC’s heightened investor protections may be necessary.
The lack of comprehensiveness in Garcia’s bill may actually prove an advantage within the legislative process. Featuring fewer potential sticking points across the wide range of digital assets and clearly tied to the fate of Libra — a topic with definite political velocity — Garcia’s Managed Stablecoins are Securities Act is certainly one to watch in 2019.
US Congressman Introduces Crypto-Currency Act of 2020
A United States congressman is the latest working to clarify determine which U.S. regulator is responsible for which digital assets.
On March 9, Representative Paul Gosar (R-AZ) introduced the “Crypto-Currency Act of 2020,” a bill that looks to choreograph a wide range of digital assets to answer to the appropriate regulator.
The Proposed Regulatory Schema
As Will Stechschulte, Gosar’s legislative assistant, explained to Cointelegraph, “the bill looks to provide not only clarity, but legitimacy to crypto assets in the United States.”
Gosar’s proposal divides digital assets into three categories: crypto-commodity, crypto-currency and crypto-security.
Respectively, the three categories would be governed by the Commodity Futures Trading Commission (CFTC), the Secretary of the Treasury via the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC).
Interestingly, the language of the bill would seem to cement the status of digital assets like Bitcoin as crypto-commodities rather than crypto-currencies. The classification of “crypto-currency” reads “representations of United States currency or synthetic derivatives” — more reminiscent of stablecoins like Tether (USDT).
The language behind crypto-securities, remains familiar: “all debt, equity, and derivative instruments that rest on a blockchain or decentralized cryptographic ledger.”
As to non-fungible tokens, the bill makes no mention.
Updates To The Bill Since December
The bill is an updated version of one that first leaked in December. The updated bill features expanded definitions for terms like “Decentralized cryptographic ledger” and “Smart contract” — concepts that U.S. legislators are struggling to cope with.
Possibly more significantly, the updated bill is more explicit about determining “primary” rather than “sole” regulatory responsibility. The exact implications remain to be seen, but the change could weaken the legal standing of crypto businesses arguing that, say, the SEC has no right to regulate them.
Industry Stakeholder Involvement In Drafting
Breaking with typical congressional practice, Gosar is presenting the bill solo, without a co-sponsor. Stechschulte told Cointelegraph that “For introduction, it’s just going to be Congressman Gosar. […] After introduction, we’re hoping to garner some serious support.”
Communications Director For Gosar Ben Goldey Explained The Emphasis On Industry Engagement Before Legislative Approval
“Since this is such a niche issue, we worked with stakeholders and outside groups/experts to get a good sense of the kind of clarity that the industry needed. We chose to gather stakeholder support before working toward cosponsors.”
One of the industry players involved in drafting the bill was pioneer Bitcoin investor Erik Finman.
Speaking with Cointelegraph, Finman said he had initially approached Gosar’s team to work on such a bill because “I like that they’re brave and will stand strong for anything.”
Regarding the bill’s history and development from the version that came out in December, Finman said that a number of participants had weighed in:
“That bill that leaked, we were experimenting with a couple of things, that was our second draft. We’re thirty-two versions away from that.”
The past year has seen a number of new draft bills, especially in response to Facebook’s white paper for Libra. Fears of facing regulation by the SEC probably contributed to changes to Libra’s initial vision of a managed stablecoin based on a “basket of currencies.”
The nearest peer to Gosar’s new bill is, however, Warren Davidson’s (R-OH) Token Taxonomy Act, initially introduced in 2018 and later updated and re-introduced in April 2019.
Finman, for one, felt that the Token Taxonomy Act had stalled out. He also said of the new Crypto-currency Act that “I think this is slightly bigger in scope.”
The Cryptocurrency Act of 2020 Is ‘Dead on Arrival,’ Washington Tells Sponsors
An omnibus bill aimed at comprehensive reform of U.S. cryptocurrency regulation was introduced Monday by Representative Paul Gosar (R-Ariz). It is thought to have little chance of passage at present but, according to lawyers and backers in the industry, it does provide insight into what a top-to-bottom new law governing crypto could look like one day.
Marshall Hayner of Metal Pay and Erik Finman, who became a millionaire from bitcoin (BTC) before the age of 18 and now runs an investment fund, contributed to the discussion draft.
Presented on March 9, the “Crypto-currency Act of 2020” sets out to define categories of digital assets and clarify which federal agency will oversee each tranche.
“The bill looks to provide not only clarity but legitimacy to crypto assets in the United States,” said Will Stechschulte, Gosar’s legislative assistant, in a press phone call.
Regulatory uncertainty hangs like a cloud over the industry as it aims to attract conventional investors. Fully 56 percent of financial advisers cite “regulatory concerns” as reason not to invest in the nascent industry, a recent Bitwise survey found.
“Regulatory uncertainty has certainly been a shackle around the ankle of U.S. investors,” Mati Greenspan, founder of Quantum Economics and a former eToro analyst, said. “Many projects are simply choosing to move elsewhere.”
While there are existing proposals aimed at providing clear guidance – such as the Token Taxonomy Act and Securities and Exchange Commission member Hester Peirce’s “Safe Harbor” proposal – Gosar’s bill is the latest to take a holistic approach to crypto regulation.
““It’s difficult for a member to move a bill in a committee of which he’s not a member, doubly so if he’s in the minority,” Brito wrote in a blog post. “
The bill divides digital assets into three categories: crypto-commodity, crypto-currency and crypto-security with the Commodity Futures Trading Commission (CFTC), the Secretary of the Treasury via the Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission (SEC) overseeing each, respectively.
“While the bill makes sense on the surface,” a deeper look reveals that its neat categorizations are potentially fatal flaws, said Lawson Baker, head of operations and general counsel at TokenSoft. A Bloomberg legal analyst said much the same, claiming an early draft of the bill “displays a lack of basic understanding of the relevant federal laws and regulatory agencies.”
Debate over the bill’s efficacy and overreach started in mid-December, when a draft version leaked. Jerry Brito, executive director of Coin Center, directed criticism at the bill’s sponsor, Rep. Gosar, who does not sit on the committees that might discuss his bill.
“It’s difficult for a member to move a bill in a committee of which he’s not a member, doubly so if he’s in the minority,” Brito wrote in a blog post. He now says the bill should be opposed on principle, if it shows any signs of life.
“It’s dead on arrival,” Kristin Smith of the Blockchain Association, said after reviewing the latest version.
Following its introduction on the floor late Monday afternoon, Ben Goldey, Gosar’s representative, said the bill will now pass to a committee for review. “Usually within the first week it will get assigned, but I suspect Financial Services [Committee,]” will take it up, Goldey said.
Finman suggested it may be reviewed first by the House Committee on Agriculture.
“It’s dead on arrival.”
Whether the bill passes or not, its sweeping ambition is already redefining the scope of crypto regulation. Attempting to simplify the issues around cryptocurrency and its relationship to the larger economy, the bill is an example of why it’s so hard to define what crypto is and how it should be treated.
CoinDesk spoke with lawyers, investors and the bill’s writers about how the bill takes on crypto’s big regulatory issues and likely goes too far.
Gosar’s bill defines crypto-commodities as an “economic good or service, including derivatives that have full or substantial fungibility; the markets treat with no regard as to who produced [them;] and rest on a blockchain or decentralized cryptographical ledger.”
This broadly defined concept would include bitcoin, ethereum, and any digital asset with free floating valuations. The bill would also place these commodities under the purview of the CFTC. However, as Robert Kim, a Bloomberg legal analyst noted: the CFTC does not regulate commodities themselves, but derivatives traded off them.
“The CFTC indicated early on that virtual currencies, such as bitcoin are commodities under the Commodity Exchange Act. However, that does not mean they regulate the day-to-day activity of spot exchanges,” said Donna Redel, board member of New York Angels and a professor at Fordham Law and Fordham Gabelli School, said. “Do they have the capacity to review that? The regulators themselves would have to see what’s feasible here.”
Similarly, FinCEN was selected to oversee “crypto-currencies,” despite not actually regulating currency. Marshall Hayner of Metal Pay thinks that’s a pedantic statement.
“When you launch a crypto product and deal with stablecoins, you’re dealing with FinCEN,” he said in a phone call. “Anti-money laundering requirements are top of mind for any firm that wants to remain compliant.”
Lawson Baker, head of operations and general counsel at TokenSoft, a technology company automating finance by porting financial assets onto blockchains, noted that the definition given to “crypto-securities” by the bill does not capture real-world use cases of blockchain technology.
The proposed definition: “all debt and equity that rest on a blockchain or decentralized cryptographic ledger,” makes sense in some contexts, Baker said, but in reference to traditional assets misses the mark.
For example, there’s mortgage debt that could be issued on a blockchain. “Under [the bill’s] rules, a tokenized mortgage would be a ‘crypto-security’ requiring registration with the SEC absent an offering exemption,” Baker said. “As we all know, mortgages are already regulated by state and federal banking laws and not the SEC.”
“My gut says we should stay nimble right now and define later. Read: push regulators to provide rule updates or additional guidance. “
Likewise, Redel pointed out that even broad definitions may not allow projects room to breathe. She pointed instead to Hester Peirce’s proposal for a safe harbor for token projects, which grants three years exemption for projects to decentralize.
“The digital asset industry is constantly evolving,” Redel said. “Any effort of legislation has to take into account future innovation in the space and what else happens in the coming years. It’s not good to bet on a horse race if you don’t know the players.”
Under the Act, a “decentralized cryptographic ledger” refers to a “ledger that (A) runs as a stand-alone blockchain that is secured through a minting mechanism…” As Baker notes, “This definition presumes all cryptocurrencies will operate on blockchains and public ledgers, completely ignoring how privacy coins like Zcash will operate in the future.”
Mati Greenspan takes a realistic view. While clearer frameworks may bring in entrepreneurs, investors and traditional financiers standing on the sideline of crypto, decisions to invest are also impacted by the larger mechanizations of the economy.
“Sentiment is way down due to the effects of the [Corona] virus and most people aren’t exactly in an investing mood lately,” Greenspan said.
Likewise, Nic Carter, a venture capitalist with Castle Island Ventures, said crypto is “an asset class that’s really just an outlet for gambling.” Adding, these “excesses of crypto [are] definitely a function of our stage in the economic cycle.”
Carter adds that clear guidance for tax liabilities are also necessary, which the bill fails to address.
What good is an omnibus bill if it cannot pass? What about more focused approaches for that matter?
The Token Taxonomy Act was successfully introduced, but was ultimately stalled during the review period. While Erik Finman is confident that his bill will pass, “I’m not even considering failure as an option,” he said, a similar situation is likely to transpire here.
“The optimum way to regulate the industry would be for the agencies to come up with a robust set of rules,” Donna Redel said.
“This is preferable than the slower process of adjudicating and then waiting for the agencies to catch up. But the courts will, hopefully, always be there to provide guidance.”
While this process is slow, and companies may lose time and competition, Redel is skeptical that any prescriptive law could cover all the facets of the industry.
Josh Lawler, a partner at Zuber Lawler, agreed. “Looking at various statutory schemes, most don’t work. The Swiss system doesn’t work, really. Some are better than others, but it’s not that easy to get a comprehensive plan.”
“My gut says we should stay nimble right now and define later. Read: push regulators to provide rule updates or additional guidance under current definitions rather than unintentionally redefine the scope of an agency’s regulatory jurisdiction,” Lawson Baker said.
SEC’s Peirce Updates Safe Harbor Proposal For Token Sales
The updated proposal adds a number of new reporting requirements for startups.
Securities and Exchange Commission (SEC) Commissioner Hester Peirce has an updated version of her proposal to let crypto startups sell tokens as initial coin offerings (ICOs) to fund their development efforts without running afoul of U.S. securities laws.
The Token Safe Harbor Proposal 2.0, published Tuesday, updates Peirce’s 2019 proposal which suggested a three-year grace period that would let blockchain projects actually develop their networks or tokens after raising funds. Under the proposal, a company could sell tokens before building the project but would be exempt from federal requirements that securities issuers register with the SEC.
Tuesday’s version would require companies to provide updates to the SEC every six months, and find outside counsel to explain whether their network could be considered “decentralized” at the end of the grace period.
“The safe harbor seeks to provide network developers with a three-year grace period within which, under certain conditions, they can facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws,” the Securities and Exchange Commission (SEC) official said in a public statement introducing the proposal.
If, within three years, the network was live and met a set of criteria for decentralization, the company would not have to register the tokens as securities or seek an exemption.
Andrew Hinkes, an attorney with Carlton Fields, tweeted that the most significant changes include the new “mandatory semi-annual updates” to the development disclosure plan, the requirement that a block explorer be linked in the company’s disclosure and the outside counsel’s reporting requirement and guidance on what that external report should address.
According to the guidance, network decentralization and functionality are treated as two different issues. Decentralization is assessed by voting power, development efforts and network participation, while functionality is assessed by the ability to transmit or store value on the network, as well as run an application on it.
Projects that aren’t decentralized within the grace period must still register as securities issuers, according to the guidance.
“It appears that trading platforms that allow trading of tokens issued under this proposed rule would not be required to be national securities exchanges or alternative trading systems provided that they stop trading the tokens within six months of the issuer’s counsel’s determination that the network did not reach maturity as provided under the rule,” Hinkes told CoinDesk.
The new proposal omitted a “good faith” provision, alongside a provision that discussed the issuer’s role in facilitating secondary liquidity.
Kristin Smith, the executive director of the Blockchain Association, said the organization “applauds the work of Commissioner Peirce” in addressing the policy issue.
“Her willingness to think thoughtfully about these problems is something to be admired, and we are hopeful that she will be able to work constructively on this proposal with the incoming Chairman,” Smith said.
Peirce published her proposal as the Senate voted to close debate on former CFTC Chair Gary Gensler’s nomination to lead the SEC (though Coinbase’s upcoming listing may be the more widely anticipated event this week). The Senate will vote to confirm Gensler on Wednesday.
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