This article was originally published here.
The recognized cryptocurrency lawyer and expert, Jake Chervinsky, seems not to be a fan of the new Token Taxonomy Act (TTA).
The Token Taxonomy Act was proposed back in December 2018 by Reps. Warren Davidson and Darren Soto. The intention is to exclude digital currencies from being considered as securities.
Jake Chervinsky Not a Fan of the Token Taxonomy Act
In a recent thread on Twitter, Chervinsky analyzed the recently presented Token Taxonomy Act to understand whether it has a positive proposal for the crypto market or not.
He started the thread by explaining that he believes that the market needs to have clear legislation to clarify how virtual currencies should be regulated. Nonetheless, he says that the Token Taxonomy Act would only create more regulatory uncertainty.
0/ Sorry to say, I’m not a fan of the new Token Taxonomy Act.
I do think we need legislation to clarify whether & how digital tokens should be regulated, but this bill doesn’t cut it. Here’s my take on why it would create *more* regulatory uncertainty, not less.
— Jake Chervinsky (@jchervinsky) April 11, 2019
As Mr. Chervinsky says, the Token Taxonomy Act proposes the amendment of the definition of a “security” under the Securities Act of 1933 and the Securities Exchange Act of 1934. Every single time that there is a securities issuer, they have to register their activities with the U.S. Securities and Exchange Commission (SEC) if they want to operate in the market.
If there is a company that issues a security without registering it with the SEC, it will be violating the federal laws about securities. If that happens, the firm will be prosecuted by the regulatory agency and it will be forced to pay a fine in addition to giving investors their funds back.
However, there are digital tokens that could be considered “investment contracts,” which is a specific type of security. As Chervinsky explains, assets are investment contracts if they involve “investment of money in a common enterprise with the expectation of profit based on the efforts of others.” This rule comes from the Howey test, which is a typology used to understand whether an asset can be considered a security or not.
Virtual currencies have been operating under in a market without clear rules. It is not possible to be sure if a token will be passing the Howey test and avoid being considered a security.
With the new TTA, digital tokens would not be considered securities anymore and virtual currency companies wouldn’t have to be worried about the Howey test anymore in the future. But Chervinsky says that the TTA’s proposal would only work if it would be easier for companies to have a clear knowledge of what a digital token is.
“In my view, the digital token definition is “less” clear than Howey,” Chervisnky wrote on Twitter.
He went on saying that TTA’s digital token definition has a number of new elements that are hard to apply. Moreover, he mentioned that it lacks a solid basis in existing jurisprudence. Thus, this is not the best way to provide clarity to the market.
Chervinsky explained that there are other experts and lawyers in the virtual currency market that have also criticized the TTA proposed. One of these lawyers is Caitlin Long, that has been working in order to promote crypto-friendly legislation in Wyoming. As she said, the definition of digital token got so “watered down that there is not even a “taxonomy” left in the TTA anymore.”
1/ UGH–HOPES DASHED! #tokentaxonomyact proposes 2 great things but the rest of it needs a lot of work. The $600 tax exemption & 1031 (like-for-like) exchange provisions are great. I wish the bill stopped there! The definition of “digital token” got so watered down that there’s..
— Caitlin Long 🔑 (@CaitlinLong_) April 10, 2019
Another critic to the TTA is Gabriel Shapiro, that compared the TTA with oil companies proposing a bill amending the definition of pollutants.
It is worth mentioning that Chervisnky believes that the existing federal securities laws are not well-equipped to address the unique challenges posed by digital assets. He also added that Congress needs to create the necessary regulations to move the industry forward.
There are different countries and jurisdictions around the world that are currently regulating the crypto market. Malta and Switzerland are just two of the countries that have decided to create clear regulatory frameworks around virtual currencies and blockchain technology. Because of their work in the legal field, there are several companies and firms that decided to locate their operations in thes.