Crypto-Lawyers Aren't Impressed With the Token Taxonomy Act

Colin Muller

Many attorneys working in the cryptoasset industry are concerned that proposed US crypto regulation, designed to provide clarity to the industry, could be even “less clear” than the cumbersome sercurities laws already in place.

The subect of this criticism is the Token Taxonomy Act (TTA), the recently re-proposed piece of legislation aiming to clarify the legal environment in which the cryptoasset industry will operate in the US. Specifically, the bill would add an amendment to 15 U.S.C. 77b(a), or the Securities Act of 1933, defining a “Digital Token” under US federal law.

The responses came in recent days in the form of tweet storms from Jake Chervinsky and Caitlin Long (among others), both American attornies who work in the industry.

The TTA’s specific objective is to exclude eligable digital assets from the possibility of being classified as securities, a kind of financial product that is highly regulated in the US and many other countries. In the US, the infamous Howey Test - first elaborated during a 1946 legal case - is used as a benchmark for determining whether or not something is a security.

Are Cryptos Securities?

The above question has plagued the nascant cryptoasset industry in the US for quite some time, and caused regulatory uncertainty which has probably had some chilling effect in the past year or so.

The US Securities and Exchange Commission (SEC), the body charged with dealing with securities regulation, has been firing shots in 2018, most notably by charging the creator of the decentralized ERC-20 exchange EtherDelta with illegally operating a securities exchange (namey, the ERC-20 tokens) - forcing him to settle and pay $400,000 in disgorgements and penalties late last year.

Crypto-Lawyers, Not Fans?

While confirming his opinon that the industry (in the US) needs better regulation, Chervinsky definitely does not see the TTA as succesful in this regard. His preliminary criticisms come within two arguments.

The first, simpler argument is that: Although the Howey Test is not easy to navigate, there does exist a vast body of legal precident on it, which took decades to build. He seems to suggest that it can be worked-with in application to cryptoassets.

His second criticism is that the TTA seems woefully hazy in how it defines digital tokens, perhaps presenting an even more uncertain definition than already troublesome securities law.

Caitlin Long agreed with Chervinsky that the definition of a digital token was far too imprecise, but also pointed out that the TTA could heap on additional harm by giving the SEC yet more remit to crack down on crypto projects.

This is the case because the TTA still affords the SEC an authority of exemption to the law change, and to issue 90-day notices for digital token project to shut down their operations.

Long publically mused as to the outcome of such an exemption, saying on Twitter: do you think that's going to play out??? [...] If I'm the SEC, I send notices to pretty much every #utilitytoken project.

Caitlin Long

Not stopping at the exemption, Long points out that the bill includes a “Preemption of State Law” clause, which would give the federal government priority in overruling any US states’ own esoteric definitions of ditital tokens - forcing them to accept the federal government’s definition rather than their own. This, Long said, is “probably unconstitutional.”