The Token Taxonomy Act has just been raised from the dead. On April 9, 2019, the new revised and “improved” version of the bill was reintroduced into Congress in a fresh attempt to finally settle crypto’s regulatory uncertainty and propel US’s blockchain industry to the moon! “The Token Taxonomy Act is the key to unlocking blockchain technology in America,” claims congressman Warren Davidson, the author of the bill. But is it really, though?
The bill addresses several legislative chokepoints. First, the bill seeks to amend the Securities Exchange Act of 1934 and the Securities Act of 1933 in order to make a clear-cut differentiation between the newly defined “digital tokens” and the definition of securities in the two aforementioned acts.
Next, in section 6 of the bill, the lawmakers assert that nothing in the bill or the amendments made by the bill should be interpreted in a way that it limits the application of the Commodity Exchange Act or the Federal Trade Commission Act, thus reaffirming previously held positions regarding the jurisdiction of CFTC and FTC over the cryptocurrency markets. Finally, the bill – if enacted, of course – shall supersede any state’s effort to impose Blue Sky Laws (state securities regulations) to “digital tokens.”
Now, no one in their right mind debates the need for a bill that clarifies opposing state initiatives and puts the SEC in check. Conflicting state regulations force crypto businesses to go forum shopping and exploit regulatory arbitrage, while the SEC has made purchasing ICO tokens practically impossible for non-accredited investors.
It’s undeniable that both states and industry stakeholders are in a dire need of a solution, but is the Token Taxonomy Act a step in the right direction?
The skepticism of token taxonomy experts
Gabriel Shapiro, a fairly recognized corporate attorney specializing in blockchain technology, goes as far as to say that he “can’t imagine legislation that is worse for blockchain entrepreneurs, regulators or markets than this,” declaring the bill an insult to states’ rights. Catalin Long from Wyoming’s Blockchain Taskforce argues that the bill can’t possibly supersede state bills on cryptocurrencies and that this section might even be unconstitutional because “if digital tokens aren’t securities, then they’re property and state law trumps federal law regarding property.”
One-size-fits-all solutions usually end up fitting nobody, and this bill is a paramount exemplar of this. The definition of “digital tokens” provided by the bill is so broad and watered down it almost makes scamming ICO investors worth a try. On the one hand, the bill gives SEC power to send 90-day notices if they deem appropriate – which considering the vague definition of digital token arguably gives the SEC even more power than before. On the other hand, it gives the potential scammers a get-out-of-jail-free card if they manage to demonstrate “reasonable and bona fides belief” that they were not selling securities.
In reality, not every aspect of the bill is all that negative.
The proposed amendment of section 1031 of the Internal Revenue Code of 1986 to include digital tokens will (if passed) treat crypto to crypto transactions as “like-kind” exchanges and stop treating them as capital gains tax events. Additionally, the bill proposes a tax exemption for token trading (for cash or cash equivalents) that results in a gross income of $600.
The latter tax exemption is great, but the exclusion of crypto-to-crypto transactions from capital gains tax was absolutely necessary and definitely a move in the right direction. Regardless of the faith of this particular Token Taxonomy Act, the need for unification and harmonization of crypto law at the federal level is unquestionable. Blockchains are borderless, and they call for borderless regulation.
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