Despite the enthusiasm of many in the crypto industry, a draft bill by House Financial Services Committee Chair Patrick McHenry (R-NC) and Agriculture Committee Chair Glenn GT Thompson (R-PA) only creates new regulatory uncertainty, according to Todd Phillips, principal of Phillips Policy Consulting. The bill attempts to sidestep the Howey Test, which is used to determine whether a token is an investment contract and therefore a security under the securities laws. It would create a new asset class called digital assets and provide that crypto tokens will either be issued as digital commodities in the first instance, or as restricted digital assets that then mature into digital commodities after they become sufficiently decentralized.
However, the bill does not define the terms equity securities and debt securities, which are two of the six qualifications that must be met for a more lenient set of disclosure requirements to apply. This means that the SEC would have to decide which tokens are equity or debt securities, and most if not all crypto tokens that meet the Howey Test would be deemed to be equities subject to traditional securities law disclosures.
Phillips notes that other options to remove SEC discretion while preventing regulatory arbitrage would similarly fail. The bill also appears to exempt DeFi exchanges from complying with the same investor protection provisions as CeFi exchanges, and the CFTC would be permitted to retroactively or prospectively exempt large swaths of the digital commodity markets from customer protection provisions.
The biggest problem, however, is with regulatory arbitrage, Phillips concludes. Their legislation – like others before it – shows just how impossible it is to [craft crypto legislation] without giving issues of traditional securities a new way to opt-out of those laws as well.