The Token Taxonomy Act Would Level the Playing Field—and State Regulations

The Token Taxonomy Act is back, back again. The bill, which excludes digital tokens from being classified as securities, clarifies the jurisdiction of regulators, and erases existing state regulations if they conflict with the Act, has been re-introduced to Congress.

Originally introduced last year in a more minimalist form, the Act was authored by Congressman Warren Davidson and co-sponsored by Representatives Darren Soto, Josh Gottheimer, Tedd Budd, Tulsi Gabbard, and Scott Perry, and seeks to clarify and streamline the conflicting regulations of various states.

The authors of the bill claim that this lack of clarity around how securities are classified on the state level has “clouded certainty for entrepreneurs and businesses that use blockchain technology.”

The bill addresses a few different regulatory grey areas. First, the bill seeks to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 so that it excludes “digital tokens” from the definition of a security, which has tax implications. It also clarifies the jurisdictions of the Commodity Futures Trading Commission and the Federal Trade Commission, noting the bill will not interfere with these entities and their efforts to protect consumers. It also says that this bill would supersede state law, where a number of regulations have grown up around tokens if they overlap with the act.

Essentially, the bill would wipe state regulations around digital tokens off the map. This includes regulations crypto advocates see as bad (many states have little to no regulation on the subject), but also the ones they see as good. For instance, it would wipe out the five landmark bills passed in Wyoming, which deftly regulate taxation, money transmission, and securities in a non-punitive manner. In this way, the playing field would be leveled, and the Act would set a baseline regulation around digital tokens that states could then build upon. A press release by the authors and co-sponsors of the bill contends that while there have been many positive laws concerning crypto regulation, “others like New York’s onerous BitLicense law have been heavy-handed.”

“The Token Taxonomy Act is the key to unlocking blockchain technology in America,” said Congressman Warren Davidson in the release.

Without it, says Congressman Davidson, the U.S. would be hurting innovation and ceding ownership of the digital economy to Europe and Asia. In passing the bill, Davidson believes Congress would be sending a message to entrepreneurs and investors across the world that the U.S. is the “best destination for blockchain technology.” He likened this bill to early efforts by Congress to spur development of the internet, where Congress passed legislation that gave developers certainty and resisted over-regulating the nascent market.

“It’s great when Congress makes it a law, because then it’s absolutely clear it’s the law, with no ambiguity around it,” says Brito. “I think that’s going to help people who are building these networks or have even already built them and are wondering about these regulations.”

The SEC released staff guidance last week with the goal of providing a framework for determining when a token may cross the line into a security. But, as BREAKERMAG reported, this move only added to the confusion around the subject. The SEC has suggested that it would move in this direction for a while, but that if token creators or investors misjudged that direction, then there would be consequences.

The Token Taxonomy Act would codify what the SEC has hinted at, and that’s a good thing, according to Jerry Brito, Executive Director of Coin Center.

“It’s great when Congress makes it a law, because then it’s absolutely clear it’s the law, with no ambiguity around it,” says Brito. “I think that’s going to help people who are building these networks or have even already built them and are wondering about these regulations.”

In a string of tweets, Caitlin Long, a veteran of Wall Street who was instrumental in pushing Wyoming’s legislation across the finish line, said that while she was in favor of the bill’s proposals, especially some of the tax exemptions, the watered down definition “digital token” results in there not even being a “taxonomy” left in the bill.

She predicted that legal challenges to this section will stymie the law if enacted.

Still, the nature of the bill has drawn praise from industry groups such as The Blockchain Association. “The Blockchain Association is pleased to support the re-introduction of the Token Taxonomy Act. In light of the recent SEC staff guidance, the open blockchain industry needs regulatory clarity more than ever—clarity that this bill provides,” said Blockchain Association Director of External Affairs Kristin Smith in a statement. “We believe that blockchain technology has tremendous potential and that we need smart, simple, and supportive legislation to make sure that the United States continues to be a leader in this ecosystem.”

The Blockchain Promotion Act, which calls for the Department of Commerce to create a standardized definition of blockchain, was also recently introduced in Congress. Between these two acts, 2019 may be the year where Congress and regulators look to cement foundational parts of blockchain and digital tokens in law, though the path to reality for these bills will be a long one.