A bipartisan pair of lawmakers want to create a new legal definition for digital tokens and exclude them from existing securities law.
Reps. Warren Davidson, R-Ohio, and Darren Soto, D-Fla., are offering a bill that would define digital tokens, similar to Bitcoin, as a means to verify information on transactions, decentralized beyond the control of one person or group, can be traded without an intermediary, and involves a mechanism aimed at building consensus among different computers in a network. Under the terms of the bill, tokens could not represent equity in a company.
Davidson promised the bill, which also includes changes meant to simplify the treatment of virtual currency transactions for tax purposes, since he convened a cryptocurrency industry summit at the Library of Congress in late September.
“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,” said Davidson in a release.
Davidson sits on the House Financial Services Committee, which has jurisdiction over financial law. Soto sits on the House Agriculture Committee, which oversees the Commodity Futures Trading Commission. That regulatory agency has jurisdiction over Bitcoin and Bitcoin futures.
Industry and the sponsors themselves said that the bill, which needs to be re-introduced in the next Congress to become law, remains a work in progress.
“While this legislation is a great first step, we are looking for feedback,” Soto said in the release. “To what extent does the jurisdiction of the FTC apply to digital tokens? Can we address this issue in this legislation or will we need subsequent legislation to effectively regulate this emerging sector?” he asked in his statement.
Kristin Smith, director of external affairs for the Blockchain Association, an industry trade group, applauded the bill’s introduction in a Medium post.
“Like all legislation in the early stages, we expect this bill isn’t perfect yet,” Smith said in the post. “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.”
She continued: “We want to work together to debate the key issues, ensure adequate consumer protection, and work toward advancing legislation that represents our collective views.”
The rise of digital tokens and cryptocurrencies, particularly through initial coin offerings, which raised billions for various startups and projects, presents a new challenge that the Securities and Exchange Commission has acknowledged: how to define a digital token, which may be necessary for computing through a blockchain network, but also can be used to raise capital for a new idea.
So far the SEC has said that it considers all cryptocurrencies, except for the two largest, Bitcoin and Ether, as securities. But the financial regulatory commission has also suggested that new digital tokens, if used primarily for a computing purpose and meeting a standard for decentralization, could be exempted from securities regulation, which could hinder a network’s growth.
“Although the SEC has put forth sensible guidance on this question, codifying that decentralized cryptocurrencies are not securities would mitigate any lingering uncertainty,” wrote James Foust, a senior research fellow at the digital currency technology-focused nonprofit Coin Center.
Brian Knight, director of the financial regulation program at the Mercatus Center, a libertarian-leaning think tank, also saw effort as an interesting first step.
“It’s a very interesting first step, and it takes seriously one of the first issues with crypto slash asset regulation, which is, ‘What is this thing?’” said Knight.
CORRECTION: A previous version of this article referred to Reps. Tom Emmer, R-Minn., and Ted Budd, R-N.C., as co-sponsors of the Davidson-Soto bill. Budd and Emmer are not co-sponsors. The Washington Examiner regrets the error.
