U.S. Congressmen Seek To Change Existing Securities Law For Cryptocurrency

­A recurring complaint from cryptocurrency participants is the idea of applying a 72-year-old securities law to digital currencies. 

The U.S. Securities and Exchange Commission uses what’s known as the “Howey Test,” a test created by the Supreme Court in 1946 for determining whether certain transactions qualify as “investment contracts.

Under the Howey Test, a transaction is an investment contract if:
1) It is an investment of money
2) There is an expectation of profits from the investment
3) The investment of money is in a common enterprise
4) Any profit comes from the efforts of a promoter or third party

In simple terms, an investment contract exists if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

The Token Taxonomy Act:

Congressmen Warren Davidson and Darren Soto introduced on 20th Dec the long-awaited Token Taxonomy Act, to provide light-touch regulatory certainty for businesses, entrepreneurs, and regulators in the blockchain economy. According to Bill,

“Once a cryptocurrency boasts its own network, it will no longer be considered as security”

This legislation draws a bright line for businesses and regulators by defining a “digital token” and clarifies that securities laws do not apply to companies that use blockchain once they reach their goal of becoming a functional network.

Davidson commented on the proposed bill, saying:

“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.”

The Token Taxonomy Act is the product of months-long collaboration following a bipartisan roundtable discussion hosted by Congressman Davidson with Members of Congress and nearly 50 stakeholders from Ohio and across the country to gather input on Congress’ effort to clarify the “sloppy” regulatory framework in the cryptocurrency space.

Implementing this fix will stop fraud from spreading and provide the certainty innovation needs to flourish.

Background of the Howey Test:

In Howey, two Florida-based corporate defendants offered real estate contracts for tracts of land with citrus groves. The defendants offered buyers the option of leasing any purchased land back to the defendants, who would then tend to the land, and harvest, pool, and market the citrus.  

As most of the buyers were not farmers and did not have agricultural expertise, they were happy to lease the land back to the defendants.

The SEC sued the defendants over these transactions, claiming that they broke the law by not filing a securities registration statement. 

The Supreme Court, in issuing its decision finding that the defendants’ leaseback agreement is a form of security. It was an important case in determining the general applicability of the federal securities laws and used as a guideline till today.