Proposed Legislation Excludes Digital Tokens from Security Regulations

As we addressed in a recent blog, the Securities and Exchange Commission (SEC) on April 3 issued a letter and provided a basic framework for analyzing whether a digital asset should be treated as a security if it is offered and sold as an investment.

Given that the communications offered only loose guidance, with many matters left open to interpretation, many believed that the SEC guidance actually raises more questions than it provides answers.

It didn’t take long for our nation’s lawmakers to take action. In the matter of a week, two companion bills were introduced in Congress to ensure that digital tokens will not be treated as securities subject to SEC regulation and federal security laws. If the proposed legislation is enacted, it could establish the “bright line” that the financial community is seeking.

The two bills are the Token Taxonomy Act of 2019 (HR 2144), introduced by Rep. Warren Davidson (R.-OH), and the Digital Taxonomy Act of 2019 (HR 2154), introduced by Rep. Darren Soto (D-FL); each has garnered bipartisan support. Significantly, the proposed legislation pre-empts state laws relating to digital currencies.

Following are the other highlights of the two bills on digital tokens.

Token Taxonomy Act

This bill enjoys broad support from both sides of the aisle. It provides greater clarity by:

• Specifically excluding digital tokens from the definition of a security
• Directing the SEC to facilitate regulatory changes relating to digital units secured through public key cryptography
• Adjusting the tax treatment of virtual currencies being held inside IRAs
• Creating a tax exemption for exchanges of one virtual currency for another
• Creating a de minimis tax exemption for gains realized from the sale or exchange of virtual currencies

Digital Taxonomy Act

Some consider this bill to be more consumer-friendly than its companion bill. It authorizes the following:

• Defining digital tokens
• Allocating $25 million a year to the Federal Trade Commission to prevent unfair or deceptive acts in transactions involving digital tokens
• Requiring an annual report to Congress concerning unfair or deceptive acts or practices in transactions involving digital tokens.

Regulatory clarity is a critical issue for any business dealing with digital assets, and any state that gets ahead of it may reap the benefits. As we see in Wyoming, multiple projects are flocking to the state as they have passed several blockchain-friendly laws in the past year. We fully expect to see more legislation introduced as companies continue to move into the digital asset space.

We will continue to monitor the progress of the legislation and keep you informed.

Do you have questions about the SEC framework or other accounting and auditing issues? Contact your Marcum representative at (855) MARCUM1.