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Congress Members Reintroduce Bill That Defines Digital Tokens and Excludes Them From Securities Laws

On Behalf of | Apr 19, 2021 | Blockchain

Cryptocurrencies have been the next big thing in the financial world for several years, but the United States laws are regulating them have been confusing at best. The days when cryptocurrencies existed only on the dark web, where people exchanged them for goods and services they would never have the guts to buy or sell in circumstances buyers and sellers were required to reveal their true identities, are long gone. These digital currencies present a new set of legal questions, though, because no centralized government entity controls them. Many countries have introduced detailed laws regulating the exchange of digital currencies, and members of industries that use blockchain technology warn that if the United States does not enact its own regulations for digital currencies, it will lose out on a valuable boost to its economy, as blockchain businesses will choose to set up shop in other countries. During the past several years, U.S. legislators have introduced a series of bills to regulate digital currencies; the most recent one, H.R. 1628, aims to clear up ambiguities and promote the blockchain technology and digital finance sectors in the United States.

About the Token Taxonomy Act

The new bill, H.R. 1628, is popularly known as the Token Taxonomy Act, and its sponsors introduced it in March 2021. The bill is a bipartisan effort; its Republican sponsors include Warren Davidson of Ohio, Ted Budd of North Carolina, and Scott Perry of Pennsylvania, and its Democratic sponsors are Tulsi Gabbard of Hawaii and Josh Gottheimer of Florida. Unlike previous legislation about digital currencies, this bill contains a formal definition of the term “digital token.” It defines a digital token as any exchangeable digital unit that satisfies the following criteria:

  • Its transaction history cannot be modified or tampered with by a single person or a single entity (such as a national government)
  • It must be able to be transferred without the involvement of an intermediate custodian
  • There must not be information asymmetry between the buyers and sellers of the tokens as to the token’s value

For these reasons, and especially because of the third reason, the bill explicitly states that digital tokens are not securities. Therefore, federal securities laws do not apply to digital tokens. According to the Blockchain Association, this distinction is important; the current federal regulations on securities are necessary to prevent fraud, but these regulations are inappropriate for digital tokens, which are exchanged without information asymmetry. Therefore, the United States should make a separate set of regulations for digital tokens. Doing this would enhance the reputation of the U.S. as a safe and favorable place for investment in digital tokens.

The Token Taxonomy Act is Just the Beginning

If you are thinking of expanding your business interests to include digital tokens, you should be careful to comply with the laws and regulations, which are still changing quickly. Therefore, it is important to work with a finance and investment lawyer in your digital currency-related business projects.