Sen. Cynthia Lummis, a Wyoming Republican, and Kirsten Gillibrand, a New York Democrat, on June 7, 2022, introduced a sweeping cryptocurrency framework that divides oversight of the market between the SEC and Commodity Futures Trading Commission (CFTC). One group warned the changes would tilt oversight too heavily toward the latter, however.
The long-awaited legislation addresses nagging confusion and disagreement over the proper regulatory scheme for digital assets, in which multiple agencies have asserted degrees of enforcement authority. Lummis in a statement said the bill “creates regulatory clarity for agencies charged with supervising digital asset markets, provides a strong, tailored regulatory framework for stablecoins, and integrates digital assets into our existing tax and banking laws.”
The Lummis-Gillibrand bill touches on a wide range of issues surrounding tax, consumer protection, custody, and other areas. Title III of the bill – Responsible Securities Innovation – would set out the SEC’s role in the new crypto regulatory scheme.
Lummis and Gillibrand have previously argued that the bill will preserve the SEC’s current test for determining whether an arrangement constitutes an investment contract – and therefore a security under the Securities Act of 1933 – through the so-called Howey Test established under he Supreme Court’s 1946 decision in SEC v. W.J. Howey Co.. Under that test, an investment contract must involve an investment of money in a common enterprise, with an expectation of profit from the efforts of a third party.
To guide the distinction between securities and commodities for certain tokens linked to securities offerings, the bill relies on the concept of an “ancillary asset,” defined as “an intangible, fungible asset that is offered, sold, or otherwise provided to a person in connection with the purchase and sale of a security through an arrangement or scheme that constitutes an investment contract” under the Securities Act. An ancillary asset cannot provide the holder with a debt or equity interest in a business entity, liquidation rights, an entitlement to an interest or dividend payment, a profit or revenue share “derived solely from the entrepreneurial or managerial efforts of others,” or any other financial interest in that entity.
An ancillary asset provided to a purchaser under an investment contract “is not inherently a security,” according to a section-by-section explainer posted by Lummis’s office. Ancillary assets would require twice-a-year disclosures to the SEC, and those assets in compliance with the disclosures would be presumed to be commodities.
Blockchain and digital asset groups lauded the bill, with some groups such as the Association for Digital Asset Markets (ADAM) and Multicoin Capital specifically praising the ancillary asset concept. ADAM, in a statement, said that provision “updates our laws to provide a sensible pathway forward for token treatment in the U.S.”
The bill, and its reliance on the idea of defining certain tokens as non-security ancillary assets, did not receive nearly as warm a reception from investor protection advocates. Americans for Financial Reform (AFR), warned that “approach would cede more regulatory power to the Commodity Futures Trading Commission while undermining existing securities law and oversight by the Securities and Exchange Commission.”
“The measure could even create a loophole that traditional securities issuers could exploit to avoid more robust disclosure requirements,” AFR said in its statement.
The bill would also establish an Advisory Committee on Financial Innovation that includes SEC and CFTC commissioners, among others; require studies on self-regulation, energy consumption, cybersecurity, and other aspects of the digital asset market; and set out definitions for several other central cryptocurrency concepts such as “virtual currency” and “payment stablecoin.”
This article originally appeared in the June 8, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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