Congressmen Tom Emmer and Darren Soto have introduced the Securities Clarity Act. The bill seeks to clarify the classification of digital assets. It aims to exclude investment contract assets from the definition of security. It will also provide certainty for the crypto industry and emerging technologies since it will also set regulatory jurisdictions.
The Security Clarity Act has garnered praise and appreciation from the crypto industry. The space has been in regulatory limbo since there is no concrete legal framework to govern digital assets. Instead of seeking clarity, regulators, like the SEC, have used regulation by enforcement to stifle the new asset class. Congress is also investigating allegations that financial agencies are trying to de-bank digital asset companies. These missteps in crypto regulations have prompted lawmakers to investigate the overreach of government agencies.
The Bill to Clarify Crypto Assets
Classifying an object is made to avoid confusion. Just imagine if we classify a simple object such as salt as a sweetener. A simple deviation would not only wreck a recipe, but it would also confuse a lot of people. This is what is happening with the crypto industry. The Securities and Exchange Commission (SEC) has labeled a lot of projects as securities, thus falling under their purview. Of course, teams behind these crypto projects have insisted that the SEC is wrong.
The Securities Clarity Act provides clarity for digital assets by setting a distinction between an asset and the securities contract that it may or may not be part of. The bill would also clarify that an investment contract asset is separate and distinct from the investment contract under which it was sold. To put it in simpler terms, a project can have a securities contract or securities, but it is possible that the token of the said contract will not be classified as a security.
Let us cite a hypothetical example for clarity. Imagine that a digital asset company named ABC123 Lab is offering a securities contract to attract investors. Now being a security contract it will of course pass the Howie Test, which we will discuss in the next section. Aside from the securities, company ABC123 will also mint utility tokens for the ecosystem it is trying to build. Under the proposed bill, these tokens will not be classified as securities.
The Howie Test
The Howie Test is used to determine if an asset is a security or not. Securities fall under the SEC’s jurisdiction. The Howey Test was created by the Supreme Court in 1946 based on a case about selling orange groves in Florida.
It has four parts that have to be true for something to be a security:
- There is an investment of money. This means you give money or something else of value to someone else.
- There is a common enterprise. This means you and other investors are pooling your money together for a shared goal.
- There is an expectation of profit. This means you hope to make more money than you invested.
- The profit is derived from the efforts of others. This means you rely on someone else’s work or skill to make money, not your own.
If all four parts are true, then it is a security and has to follow applicable rules and regulations. While it is right to follow the law, the problem lies when regulators do not know how to properly classify an asset. The video below will show that even the SEC chair is having a hard time answering if an asset is a security or not.
There Might Still Be Hope for Crypto in the U.S.
The hostile treatment of crypto companies is stifling innovation in the United States. It has come to the point that digital assets are just being used as scapegoats for the recent bank failures. This has forced some companies to relocate outside the country. This has resulted in the exit of capital and opportunities to friendlier jurisdictions like Dubai and Hong Kong. These jurisdictions have clear and proactive regulations towards digital assets, something the U.S. lacks.
Hopefully, the bill sponsored by Congressman Emmer will change the way digital assets are treated in the country. These will not only protect the crypto industry but will also attract more investors and allow consumers to participate in this innovative technology.
Image from Pixabay
