This bill would clarify a 70-plus-year-old U.S. Supreme Court decision involving the Securities and Exchange Commission and a Florida orange farmer that addressed whether an "investment contract" is considered a security. The "Howey Test" resulted from this decision, and it says an investment contract comes when "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party," according to the court.
Davidson, whose district includes Butler County, and Soto say cryptocurrencies should not be held to this test.
“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,” Davidson said.
Implementing this fix will also stop fraud from spreading in the burgeoning industry, Davidson said, and he hopes the ensuing clarity will allow innovation to flourish. Innovations in the cryptocurrency technology blockchain “have outpaced current law and court decisions,” he said.
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Most people think of Bitcoin, a non-backed decentralized digital currency, when cryptocurrency is mentioned, but the industry is more diverse. Cryptocurrencies are digital or virtual currencies — like digital coins or tokens — that are encrypted, or secured, using cryptography. There are payment transfer coins or tokens, like Bitcoin, but there are other types that don’t deal with payments, such as a utility token that can unlock features inside a software application or a security token that performs a computing security task — like logging into a computer system.
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In addition to inapplicable red tape, Davidson said this frees the SEC to perform more critical consumer protection enforcement responsibilities involving things like securities fraud.
This bill comes some three months after Davidson, a Republican from Troy, hosted a roundtable discussion with fellow lawmakers and representatives from nearly 50 companies, from finance firms to cryptocurrency businesses. Davidson, along with Soto and Congressmen Ted Budd, R-North Carolina, and Tom Emmer, R-Minnesota, committed to the participants and stakeholders to push for legislative certainty.
If this bipartisan bill passes, Davidson said American cryptocurrency markets would be able to compete with other countries, like Singapore and Switzerland, "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." Europe has become a haven for cryptocurrency companies as they're locating to regulation-friendly countries, which are writing rules for the industry to operate, according to Bloomberg.com.
The Davidson-Soto bill won’t get any traction before the end of this session of Congress, which is days away, but a goal of introducing it now is to get feedback, according to Davidson’s office. The plan is to re-introduce the bill after the 116th U.S. Congress convenes in January. But Soto said while the bill is a start, more will be needed.
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“While this legislation is a great first step, we are looking for feedback. The Federal Trade Commission has a history of policing web services, while the Commodities Futures Trading Commission has authority over commodity derivatives,” he said. “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?”
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