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With crypto advocates and legal advisors decrying many of the recent actions and enforcement measures taken by the SEC against crypto exchanges, stablecoin issuers, and other market making platforms, the need for regulatory clarity is growing more urgent. While some legal experts in the space state – correctly – that the actions taken by the SEC make sense when viewed in the context of previously issued comments, this does not change the fundamental concerns.
Even if the ongoing legal cases with Binance and Coinbase – both of whom have the financial resources and management commitment to see them through – are resolved via the courst system, the likelihood is that these cases will not set far-ranging legal precedent. Oftentimes, as in the Jarrett staking case, the outcomes of the cases are limited to the specific parties involved, and do not lead to sweeping regulatory changes.
Some of the fundamental issues that have resurfaced with regards to regulatory guidance and transparency have to do with 1) which cryptoassets will be treated and regulated as equity securities, and 2) how this decision will impact other operators in the crypto space. The Securities Clarity Act, introduced by Representatives Tom Emmer and Darren Soto, is an admirable attempt to address this issue in a concise manner. Let’s take a look at the core points of this proposed bill, and why enacting them would be a good first step toward making the U.S. more open and amendable to cryptoasset development.
Distinguishing Between Investment Contract And Asset
A commonly cited piece of data used by the SEC and other advocates of cryptoassets-are-securities is the fact that organizations are issuing tokens with the express intent of raising money, using these funds to conduct business operations, and that investors are purchasing these tokens with the express intent of earning a profit as a result.
The Securities Clarity Act would delineate and distinguish between the underlying investment contract that governs the actual issuance of the token and/or cryptoasset itself, and the token instrument. Specifically this proposed legislation would state that even if an investment contract transaction (the offering) has taken place, that the investment contract asset (the token) need not automatically become a security as a result.
Such an approach also has the benefit of building upon and leveraging the Howey Test, and therefore is not trying to recreate the wheel or otherwise upend the entire financial regulatory framework in the United States.
SEC Still Has The Final Say
Another interesting component of this proposed act is that the SEC will still have ultimate jurisdiction over what is and what is not classified as an equity security. This might disappoint some of the more maximalist minded crypto advocates in the marketplace, but is an important measure for the time being. As strict and adversarial as Gary Gensler has been perceived – by some – to be versus the cryptoasset space, the SEC as an organization serves an important role in the smooth functioning of U.S. capital markets. No chairperson lasts forever, and retaining oversight of crypto at the most powerful and well-staffed U.S. markets regulator makes logical policy sense.
What the SCA would accomplish is create a crypto-specific, unique, and repeatable framework for organizations seeking to issue tokens to work within while entering into dialogue with the SEC. While the SEC has encouraged firms to register with the agency, this has proven difficult to do so in practice, due in no small part to the lack of standardized frameworks for token issuances. Retaining transparency and objective rule-making over the cryptoasset marketplace, which has had its fair share of frauds and scams occur, is something that ethical actors and firms should applaud.
Better Accounting And Tax Standards
One of the major issues with cryptoassets remains the somewhat tricky tax and accounting questions that yet to be addressed in a systemic and objectives manner. While the Financial Accounting Standards Board has put forward some proposed guidance that looks on track to be codified by the end of the year, that remains the extent of productive financial reporting dialogue. The FASB standard, ground-breaking as the first crypto specific accounting standard under Generally Accepted Accounting Principles, is limited in its scope as it pertains to only bitcoin and ether, mirroring the limited approach taken the already passed MiCA legislation from the European Union.
Accounting and financial reporting do not exist in a vacuum, however, and more transparent and repeatable rules around reporting and disclosures for U.S. traded firms would help this process proceed along productively. Comparable and relevant financial data is the lifeblood of any asset class, and cryptoassets have been subjected to a lack of both even as they have grown in prominence since bitcoin burst into the mainstream conversation in 2016. Improved and more consistent reporting, regulatory, and disclosure requirement would go a long way toward better tax and accounting rules.
Crypto legislation is going to be a long process, but the SCA is a good first step in the right direction.
