Amid America’s coronavirus woes and election-year nastiness, blockchain and cryptocurrency suddenly emerged as hot new topics of conversation in Washington this week. As Capitol Hill welcomed two major bills that could profoundly reshape the cryptocurrency industry, the U.S. Treasury unveiled a new initiative to use blockchain technology to streamline grant-making.
Tokens are commodities, not securities
The Securities Clarity Act aims to give digital tokens a specific and unique legal framework that is currently absent from the U.S. regulatory regime. Put forward to the House by Rep. Tom Emmer of Minnesota — the chairman of the National Republican Congressional Committee and co-chair of the Congressional Blockchain Caucus — the proposed law seeks to create a new definition of securities laws to specifically exclude cryptocurrency tokens from what is defined as a security.
Should it be passed, it would create a new legal category called “investment contract asset.” Effectively, this would separate the sale of the token from the investment contract itself. According to a statement on Emmer’s website, “this new term would refer to any asset sold as part of an investment contract that would not be considered a ‘security’ but for its sale as part of an investment contract.”
Digital tokens associated with security offerings “are in fact, and always were, commodities” and would thus prohibit the Securities and Exchange Commission from adjudicating against projects that offered tokens based on the underlying contract. This, of course, would exclude token projects from the Howey Test, which has been a thorn in the side of many blockchain companies that raised funds via a token sale — such as the esports betting platform Unikrn, which recently settled with the SEC for $6.1 million over securities law violations that might not have existed had this act had been in effect
This also addresses a major pain point that frequently has been brought up by SEC commissioner Hester Peirce, who is known for her dissents against SEC rulings that target firms that chose to fundraise via ICO — such as Unikrn, Telegram, and EOS. Peirce, who came to the defense of Unikrn in a published statement, has long criticized the “rigidity” of the Howey Test as a vehicle that stifiles fintech innovation.
“I think it’s really making it impossible for a project to get started without falling into that Howey definition,” Peirce recently told Forkast.News Editor-in-Chief Angie Lau in a video interview. She added that the Howey Test has “been a quite useful framework for us to think about whether an investment contract is, in fact, a security. But it does lead to some really interesting questions about whether things that none of us might have thought are securities actually are securities.”
Commodities are regulated by the CFTC
In parallel to Emmer’s bill, Rep. Mike Conaway of Texas introduced the Digital Commodities Exchange Act, which creates a regulatory framework for cryptocurrency exchanges via the Commodity Futures Trading Commission to the House Agriculture Committee, which oversees the CFTC.
The Digital Commodity Exchange Act (DCEA) seeks to “regulate the trading venues which list emerging digital commodities, such as Bitcoin, Ether, their forks, and other similar digital assets, for trading,” according to a posted summary of the bill. The bill would create a Digital Commodity Exchange, or DCE, and regulatory definitions that would encompass digital exchanges. DCEs would be subject to rules regarding customer fund protection, cybersecurity, capital requirements, and public reporting — which many say are overdue for bringing greater transparency and investor protections to the cryptocurrency exchange industry.
Right now, crypto exchanges are regulated at the state level as money service providers, which means a patchwork of competing and sometimes conflicting licensing arrangements. Under the framework proposed in this bill, cryptocurrency exchanges would be federally regulated, allowing them to operate in the entire country under one regulatory regime rather than applying for individual state licenses.
The DCEA also delineates legislative responsibilities for token creation and sales. Under the DCEA, the SEC would have authority to regulate regulate the underlying investment contract behind token sales specifically during the pre-sale period. But once the company offering the token delivers the token to the market, it would be considered a digital commodity and fall under the CFTC’s mandate via DCEA.
In a blog post, Peter Van Valkenburg, director of research for Coin Center, a non-profit research and advocacy organization in Washington D.C., highlighted that these bills provide much-needed clarity, guidance and boundaries to an industry that had been dragged down by regulatory confusion and its Wild West culture.
“This one bill addresses all three of these policy issues: the need for a federal alternative to state licensing, the need for clarity over SEC jurisdiction, and the issue of cryptocurrency price manipulation and the need for spot-market supervision,” Van Valkenburg wrote. “We’re thrilled that these two bills, which enjoy the support from members of both parties, are taking reasonable approaches toward solving longstanding cryptocurrency policy issues.”
Tokenizing grant payments
Cryptocurrency-friendly legislation wasn’t the only thing in the works in blockchain-minded Washington on Thursday. The Bureau of the Fiscal Service — a division of the U.S. Treasury — announced a “Blockchain for Grant Payments” project that seeks to use blockchain technology to improve the transparency and efficiency of grant payment disbursements.
“By tokenizing relevant grant award information and combining it with grant payment information on the blockchain, we gain a new payment transparency that we couldn’t reach previously without significant and burdensome reporting,” said Craig Fischer, Fiscal Service Supervisory Program Manager, in a statement.
According to an initial report that came out earlier this year to introduce concepts to lawmakers, in 2018 there were $20 billion in overpayments disbursed to grantees, and company grant managers had to dedicate 40% of their workweek to compliance measures — making sure their organization did not get overpaid.
By incorporating blockchain technology to the grant payment process, the hope is, there will be better controls on the government side over who gets paid, how much, and when — which would allow grantees to dedicate more of their time to using the funds given to them for the intended purpose.