Don't Call It A Comeback: With Two Bills, U.S. Lawmakers Aim To Give New Life to Non-Security Tokens

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It has been an eventful few days in the crypto community, especially for the lawyers. Less than one week after the U.S. Securities and Exchange Commission’s (the “SEC”) Staff released a landmark “ Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets ,” announcing FinHub’s publication of an analytical token framework (the “Token Framework”) and the Division of Corporation Finance’s first digital asset sale-focused no-action letter (the “TKJ No-Action Letter”) (collectively, the “Token Guidance”), U.S. federal legislators introduced two ambitious bills expressly aimed to support the U.S. blockchain industry: the Token Taxonomy Act of 2019 (H.R. 2144) (the “TTA”) and the Digital Taxonomy Act (H.R. 2154) (the “DTA” and, together with the TTA, the "Bills").
Controversy has, predictably, ensued.
But as blockchain lawyers throughout the Twitter-verse, the LinkedIn-mosphere and beyond issue-spot and analyze the potential implications, complications and limitations of the Bills and the Token Guidance, let’s pause for a moment to reflect on how remarkable and powerful it is to have broad bi-partisan support for non-security token sales. In the past 10 days, federal regulators and legislators may have breathed new life into a U.S. blockchain and crypto industry that – outside of states like Wyoming – had begun to resemble a repeat of the traditional financial space, including with respect to who may participate.
For those who sounded the death knell for the non-security token sale, it is time to unring that bell.
A Hunger for “Clarity”
While reportedly not timed in reaction to the SEC’s April 3, 2019 Token Guidance, Congressman Warren Davidson’s (R-OH) public comments when introducing the Bills appeared to express disappointment with existing guidance:
“ The lack of regulatory certainty in the U.S., combined with confusing, spasmodic guidance from the SEC, and an inconsistent patchwork of court decisions, has capital and innovation fleeing the U.S. market for the welcoming certainty of other jurisdictions .”
Representative Davidson's statement echoed the sentiment of many in the blockchain space, who have repeatedly and vocally sought bright-line answers and safe “swim lanes” for digital token sales. Yet, those deceptively “simple,” black-and-white results may be extraordinarily difficult for U.S. regulators to provide, as certain key existing legal frameworks (such as the Howey test, used to determine whether a digital asset sale is the sale of an investment contract and, hence, a security) are principles-based and intentionally involve highly individualized, facts-and-circumstances-based analyses.
Initial reactions from certain lawmakers, market participants and lawyers to the SEC’s Token Guidance have been mixed. Some – including this author, as will be explained in a separate piece – view the very existence of the Token Framework and the TKJ No-Action Letter as meaningful steps forward for the industry and the future of bona fide non-security token sales. Others lament that the Token Framework, while potentially useful as an analytical tool, represents the SEC Staff’s non-binding views and introduces new terminology and questions, rather than that elusive “legal clarity.”
Query, however, whether what some in the market truly seek is not mere “clarity” of the SEC’s existing position concerning digital token sales, but, instead, a different view altogether. Prior SEC guidance, including in the form of enforcement actions, cease-and-desist orders, a 21A report of investigation and certain speeches, repeatedly expressed the view that nearly every sale of digital tokens is likely to be the sale of a security, absent guidance to the contrary. The Token Framework itself specifies that it supplements, but does not replace, existing SEC guidance and laws. Examined through that lens, it arguably should be unsurprising that the Token Guidance does not – and perhaps cannot – provide broad relief for non-security token sales.
Perhaps the real way to sate the crypto market’s hunger is not to seek reinterpretations of existing law, but for lawmakers to introduce new laws – as certain U.S. States, perhaps most prominently, Wyoming, have done.
The Bills
Enter the Token Taxonomy Act and the Digital Taxonomy Act . Authored by Representatives Warren Davidson (R-OH-08) and Darren Soto (D-FL-09), respectively, the Bills were introduced April 9, 2019 with a goal “to provide regulatory certainty for businesses, entrepreneurs, and regulators in the U.S.’s blockchain economy.”
Calling the TTA “the key to unlocking blockchain technology in America,” Congressman Davidson asserted, “Without it, the U.S. is surrendering its innovative origins and ownership of the digital economy to Europe and Asia.”
Indeed, certain other nations, including Switzerland, Gibraltar and Malta, have laws that arguably are more welcoming to non-security token sales. As Marco Santori, President and Chief Legal Officer of, explai...