New Crypto-Friendly Bill Aims to Bring U.S. Securities Laws to 21st Century

On Thursday (20 December 2018), U.S. congressmen Warren Davidson (OH-08) and Darren Soto (FL-09) introduced the bipartisan bill "Token Taxonomy Act of 2018" (H.R. 7356) in order to "provide light-touch regulatory certainty for businesses, entrepreneurs, and regulators in the blockchain economy."

H.R. 7356 is "the product of months long collaboration" following the bipartisan roundtable hosted on 25 September 2018 by Congressman Warren Davidson in Washington, DC on how cryptocurrencies should be regulated; as CryptoGlobe previously reported, this was attended by around 50 representatives from Wall Street, venture capital firms, and the crypto industry. It was there that Congressmen Darren Soto, Ted Budd (R-NC), and Tom Emmer (R-MN) "united in a commitment with other panel participants and stakeholders to provide the legislative certainty innovation needs to flourish in the U.S."

Aims of the Token Taxonomy Act

This piece of bipartisan legislation has the following main goals:

  • "to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security";
  • "to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography";
  • "to adjust taxation of virtual currencies held in individual retirement accounts;
  • "to create a tax exemption for exchanges of one virtual currency for another";
  • "to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes".

According to the joint press release by the two congressmen, this legislation "clarifies that securities laws do not apply to companies that use blockchain once they reach their goal of becoming a functional network", and the implementation of "this fix will stop fraud from spreading and provide the certainty innovation needs to flourish."

Congressman Warren Davidson

“This bill clarifies a 1946 court case that the SEC has been using to determine what a security is and effectively makes it clear that the finished product (or oranges as it relates to the Howey Test) is no longer a security."

“Providing this much needed certainty frees the SEC to perform its vital and much needed consumer protection duties of enforcement on those who have engaged in securities fraud by making false claims or simply attempting to engage in regulatory arbitrage to circumvent securities law."

“This bill provides the certainty American markets need to compete with Singapore, Switzerland, and others who are aggressively growing their blockchain economies. To be certain, there will be other regulatory initiatives at some point, but this legislation is an essential first step to keeping this market alive in the United States."

“In the early days of the internet, Congress passed legislation that provided certainty and resisted the temptation to over-regulate the market. Our intent is to achieve a similar win for America’s economy and for American leadership in this innovative space."

Congressman Darren Soto

“While this legislation is a great first step, we are looking for feedback. The Federal Trade Commission (FTC) has a history of policing web services, while the Commodities Futures Trading Commission (CFTC) has authority over commodity derivatives. To what extent does the jurisdiction of the FTC apply to digital tokens? Can we address this issue in this legislation or will we need subsequent legislation to effectively regulate this emerging sector?”

Reaction From Coin Center

Coin Center, which is based in Washington, D.C., is "the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum," and its mission is to "build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permissionless blockchain technologies."

In a post published yesterday, Senior Research Fellow James Foust wrote:

"We are happy to see continued action from Congress to implement common-sense clarifications and adjustments to the regulatory treatment of cryptocurrencies. We are looking forward to continued engagement with policymakers on these issues to ensure that the fruits of cryptocurrency innovation are not lost to ill-considered policy."

 

Featured Image Credit: Photo via Pexels.com

Bitcoin Veteran Peter Todd: Reducing Bitcoin’s Block Size to 300KB Is a “Dumb Idea”

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Peter Todd is a Bitcoin veteran. Describing himself as an Applied Cryptography Consultant, Peter has been interested in digital money ever since he read Adam Back’s seminal Hashcash paper as a teenager. Having spent a lot of time himself thinking about how to create a digital currency - when the bitcoin paper was released in 2009, Peter realized that the solution had been found.

Formerly a Bitcoin Core developer, Peter has emerged as one of the most prominent voices in the space, regularly providing a more technically-based commentary to the changing winds of the crypto scene.

Short, sharp and to the point, Peter answered a few of my questions about bitcoin, crypto more broadly, and what the future holds for the industry.

Avi Rosten: How did you get into crypto?

Peter Todd: Via the Freenet Project, back in highschool. Like any good civics/democracy minded high schooler would be, I believed in freedom of speech and Freenet was an obvious way to promote that.

AR: What are some of the developments in the crypto space in the past couple of years that you find most interesting?

PT: Lightning is probably the biggest one. Monero and Zcash second, although remember that "interesting" doesn't necessarily mean "good".

AR: What do you think about recent talk by some Bitcoin Core developers around reducing Bitcoin's block size?

PT:  Some? I think you mean basically just one, Luke. I think it's a dumb idea that's a mere tweak at high cost.

(Peter explained a little more expansively in this interview for the WhatBitcoinDid Podcast why he doesn’t like small block sizes: “I think his technical arguments for that are good, but I think he doesn’t understand the social side of that, which essentially makes it impossible.")

AR: When the bitcoin block reward eventually goes to 0, will mining fees act as enough of an incentive?

PT: Maybe? Maybe not? It'd certainly have been less risky to have some small perpetual inflation, or at least a Monero-like "tail emission"

AR: What do you think of the Lightning network? Will it enable bitcoin to become a widely-used medium of exchange?

PT: How widely used is widely used? Bitcoin is already a fairly widely-used medium of exchange amongst use-cases that need it - lots of services and people at risk of censorship use it, from Patreon alternatives to file hosting sites.

If you're talking about replacing credit cards and the like, it'll probably never happen.

AR: Do you think Bitcoin should incorporate some privacy features or do you think it would make Bitcoin less useful as financial regulators might then treat it as a privacy coin e.g. Japan's FSA's order to exchanges not to deal with privacy coins?

PT: From a purely technical perspective most of what people think of as "privacy features" are risky to implement, with a high chance of a bug leading to the destruction of the entire system. Monero has already had one inflation bug, and Zcash has had two (including the one caught just prior to initial release).

On the other hand, Bitcoin already has many onchain privacy features, ranging  from the UTXO model to various technical things that make Lightning possible. And on the second layer, having at least some level of privacy isn't just a feature, it's mandatory: without decent privacy you can't get scaling, as to scale you have to make transaction data less widely distributed.

AR: What do you think of the two most recent implementations of the MimbleWimble protocol (Beam and Grin)? If the community decided that Bitcoin needed to have these privacy features, what do you think would be the best way to implement them?

PT: I just don't see that happening for another 5-10 years. These protocols are just too new to trust for something as valuable as the entire Bitcoin system. Better to adopt them as additional layers, as Liquid has done.

AR: If you wanted to work with smart contracts, which of the existing platforms would you use? Ethereum, EOS, TRON, Rootstock (RSK) ...?

PT: They're all bad. Their idea of smart contracts doesn't make much sense for most applications. Lightning is currently the best example of a smart contract system in production, and the on-chain scripts it uses are trivial.

There's very little reason to have complex on-chain smart contract schemes.

AR: What’s your biggest criticism of Ethereum?

PT: See the previous question.

It's just not a model that makes much sense.

AR: How do you think crypto news and media could improve?

I'd say get more competent journalists and give them more time and resources to write articles. But realistically, where's the money to do that going to come from?