A Senate Republican on Sept. 29, 2022, introduced legislation that would create a temporary safe harbor from SEC enforcement actions for digital asset exchanges. S. 5030, the Digital Trading Clarity Act of 2022, is sponsored by Senator Bill Hagerty of Tennessee.
The measure is part of a broader effort in Congress, generally led by Republicans, to grant relief to a crypto industry that has struggled to adjust to the SEC’s active approach toward enforcement.
At the core of that approach is the SEC’s contention that many digital assets qualify as investment contracts, and therefore securities, under the “Howey Test” established in the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co. Under that test, an investment contract – which is classified as a security under the Securities Act of 1933 – must involve an investment of money in a common enterprise, with an expectation of profit from the efforts of a third party.
Hagerty’s bill would set out that a digital asset not subject to a determination by the SEC or a federal court, and listed through an intermediary that meets certain requirements related to custody, disclosure and other investor protections, would not be considered a security.
If a federal court through a final judgment, or the SEC through a “a statement, formal rulemaking, or enforcement action, and without objection from the Commodity Futures Trading Commission” determines that a digital asset is a security, the bill requires the Division of Examinations to request information from an intermediary listing that asset to determine if the intermediary meets the above requirements, according to the bill text. If it does, the intermediary and digital asset enter into a two-year “compliance period” in which the intermediary would not be subject to enforcement actions for listing that asset or failing to register as a national securities exchange or broker-dealer in connection with that asset.
Hagerty, in a statement, said “the current lack of regulatory clarity for digital assets presents entrepreneurs and businesses with a choice: navigate the significant regulatory ambiguity in the U.S., or move overseas to markets with clear digital asset regulations.”
“Sadly, this uncertainty discourages investment and job creation here in America and jeopardizes the United States’ leadership in this transformational technology at such a crucial time,” he said. “This legislation is an important step toward providing digital asset intermediaries with much-needed certainty and removing the barriers to entry currently impeding the growth and liquidity of U.S. cryptocurrency markets.”
Hagerty’s bill comes weeks after SEC Chair Gary Gensler, in a speech, argued that the “vast majority” of the nearly 10,000 crypto tokens on the market are securities. (See Gensler Pushes Back Against Crypto Industry Claim that SEC Has Not Provided Regulatory Guidance in the Sept. 9, 2022, edition of Accounting & Compliance Alert.)
This article originally appeared in the October 5, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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