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Token Taxonomy Act Seeks to Provide Regulatory Clarity to Crypto Industry

1/11/2019 Blog

Two United States congressmen introduced legislation in late December that would exclude certain digital currencies from being defined as securities – a bill that, if enacted, may finally provide the cryptocurrency industry with regulatory clarity regarding when the offer and sale of digital tokens must comply with federal securities laws.

The Token Taxonomy Act of 2018 – introduced on December 20, 2018 by Reps. Warren Davidson (R-Ohio) and Darren Soto (D-Florida) – would, among other things, amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude "digital tokens from the definition of a security,” as well as exempt digital tokens from the registration and reporting requirements of Section 5 of the 1933 Act. The bill effectively defines “digital tokens” as tokens created through the operation of the blockchain process and that are not “a representation of a financial interest in a company, including an ownership or debt interest or revenue share.” The definition explicitly includes such tokens issued through an initial coin offering (ICO, or the process of raising capital in exchange for tokens).

The bill leaves room for the SEC to deem certain “digital units” as securities – an umbrella term meant to represent any “economic, proprietary, or access rights that [are] stored in a computer-readable format” – if such units fall outside the definition of “digital tokens” and are actually meant to serve as equity. And when a party has a “reasonable and good-faith belief” that it is selling a token (versus a security) and the SEC disagrees, the bill grants that party a 90-day safe harbor period wherein it can avoid penalty by halting the sale of all tokens and returning all proceeds.

Read the full blog post, here.

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