The Senate yesterday unveiled a preliminary draft of its crypto market structure legislation—a companion bill to the House’s sweeping CLARITY Act passed last week with bipartisan support. And while there are differences, there is one common theme throughout: crypto startups may soon have a legal path toward raising money through ICOs like never before.
The bill released earlier this week came from the Senate Banking Committee, and it deals primarily with securities and the SEC; the other half of the Senate’s crypto bill, pertaining to commodities and the CFTC, will be released by the Senate Agriculture Committee in the coming months.
On the whole, the securities-focused portion of the bill appears to achieve many of the same outcomes as the House’s CLARITY Act: amending New Deal-era securities laws to formally carve out crypto, and moving most oversight of the crypto market from the rigorous SEC to its more hands-off sister agency, the CFTC.
The language contained in the Senate version of the bill is nuanced, and it allows for some discretion from both the SEC and CFTC for later interpretation and rulemaking. But the intent is simple: The legislation is meant to allow crypto businesses to get back to selling tokens and raise startup capital, without fear of retribution from regulators.
“We want to reduce legal barriers to entry,” a GOP Senate aide told Decrypt. “You don’t want your typical crypto projects to have to pay a million dollars to obtain some sort of legal memo from some expensive law firm saying ‘We think you’re a commodity,’ or ‘We think this thing is a security,’” the staffer said. “Because that makes it more difficult for crypto projects to get off the ground.”
The Senate bill is both more concise and less aggressive in scope than the CLARITY Act, legal experts and crypto policy wonks told Decrypt. That combination has some in the industry excited about its potential effectiveness, and others unsure about whether the legislation would leave token developers and the SEC in murky waters in some cases.
The Senate bill, only 35 pages long (in contrast to the House’s whopping 168 page CLARITY Act), creates a pathway for token issuers to fundraise up to $75 million a year for up to four years, via tokens sales, so long as the tokens do not offer holders certain security-like benefits.
Such benefits would include debt or equity interest in an entity; liquidation rights in an entity; entitlement to interest, dividends, or other payments from that entity; or any other express or implied financial interest in the entity.
If a token satisfies those requirements, it would be deemed a non-security “ancillary asset” firmly outside the SEC’s jurisdiction. The ancillary asset framework is not new. It was lifted from the Lummis-Gillibrand bill, the Senate’s original stab at market structure legislation, which never saw a vote.
What’s more, tokens that initially failed to meet the criteria could, at a later date, prove they did not engage “in more than a nominal level of entrepreneurial or managerial efforts” that primarily determined their token’s value for at least a year, and receive the same exemption.
Drew Hinkes, a partner at Winston & Strawn specializing in digital assets, told Decrypt the ancillary asset framework shows how the Senate is attempting to thread the needle between carving crypto out of the SEC’s purview while at the same time preventing such carveouts from spilling over into the traditional securities market.
“The SEC needs to balance creating opportunities for lower-friction token issuances with the risks of token issuances impacting traditional equities markets,” Hinkes said.
“The bill, in identifying specific features of assets that would disqualify them from being ancillary assets, attempts to exclude assets that would carry the hallmarks of securities,” he continued.
One crypto policy leader who spoke with Decrypt said they were a fan of the framework, given its straightforward nature. While the House’s CLARITY Act did offer sweeping exceptions that deemed nearly every existing crypto asset a commodity, the bill was also “insanely convoluted,” the policy leader said, in its creation of an intricate set of rules regarding token ownership thresholds for issuers and limitations around selling. The Senate bill, they said, is more elegant in its approach.
So if the Senate’s market structure bill passes as written, does that mean it’ll be open season for ICOs again?
Amanda Fischer, policy director at the consumer advocacy nonprofit Better Markets, says it likely would—in practice—but not with the amount of black-and-white certainty many in crypto likely crave.
Fischer, who previously served as former SEC Chair Gary Gensler’s chief of staff, considered the CLARITY Act to be more of a gung-ho handout to the crypto industry than the more cautious Senate market structure bill.
“I’ll say that I respect the CLARITY Act for at least having the courage of its convictions and wholesale exempting,” she told Decrypt. “I think it’s awful, and will have a lot of unintended consequences, but I think it’s actually clearer in the scope of conduct it wants to exempt.”
One clause in the Senate’s new bill, for example, forbids SEC-exempted crypto tokens from offering an “express or implied financial interest” in the entity that sold them. What could that mean? Governance rights? An obviously implied connection between a token’s price and the issuer’s continued operation?
“If I were crypto, I would really have concerns with [that],” Fischer said. “There’s a ton of tokens that would meet that bill.”
The GOP Senate aide attempted to downplay any perceived differences between the aims of the new bill and the House’s CLARITY Act.
“Both CLARITY and our discussion draft attempt to assure that the underlying assets sold in connection with an investment contract are generally not securities,” they said.
The aide added that any murky areas in the bill related to which kinds of crypto tokens qualify as securities, and which don’t, will be addressed by SEC and CFTC rulemaking once the bill is ultimately passed.
“There will be edge cases, and over time, these edge cases will be resolved through guidance and rulemaking and orders and exemptive relief,” they said.
Why might the Senate’s market structure bill appear less aggressive when it comes to carving crypto out of decades-old securities laws than its counterpart in the House? Fischer contends it’s a bid to assure wavering Senate Democrats that the bill’s impact on traditional securities markets will be limited.
“I think it’s a fig leaf to reassure Democrats that there are guardrails that will prevent other types of securities from migrating into this exemption,” she said.
But in practice, she said, it will be immensely difficult for the SEC to ever again go after crypto companies and token issuers en masse for violating the rule.
“The SEC is going to be on its back foot,” she said. “It’s going to make enforcement way harder, because the presumptions they need to overcome to be able to sue someone in this bill are much higher.”
