New bipartisan legislation defines digital tokens, paves way for pro-innovation policy

Today the bipartisan Token Taxonomy Act (H.R. 7356) was introduced by Reps. Warren Davidson (R-OH) and Darren Soto (D-FL). The Blockchain Association applauds this pro-innovation legislation, which provides much needed regulatory certainty on how to classify tokens used in public blockchain networks.

What does this new bill achieve?

This legislation proposes a definition of “digital token,” a new term for cryptocurrencies and other network tokens, and explicitly excludes them from the definition of a security. Digital tokens promote the open exchange of information and value and decrease the potential for fraud. They must be created in accordance with specified rules, recorded in a decentralized digital ledger, and capable of being traded without an intermediary.

Securities laws aim to address information asymmetry between investors and promoters, and there are many situations where consumers benefit from the application of securities laws. This bill preserves the SEC’s authority over such financial products that are securities, whether they are issued as tokens or traditionally.

Also, this legislation includes provisions that would address issues with the tax treatment of tokens. In 2014, the IRS declared that “virtual currencies” be treated as property, which means capital gains taxes need to be calculated for all transactions. This adds tremendous friction to decentralized networks. The legislation addresses this by providing a de minimis exemption for gains less than $600 and allowing for tax-exempt like-kind exchanges.

With these terms clarified, we can police bad actors while encouraging the good ones, giving US-based innovators the framework they need to build next-generation technologies and services here rather than doing that valuable work overseas.

How does this bill relate to current SEC policy?

Currently, the most detailed guidance from the SEC on this subject comes from a June 14th speech by Bill Hinman, the director of the Division of Corporation Finance. We believe that the definition of a digital token and elements from the Hinman speech have similarities — both frameworks acknowledge that decentralization is a key factor in determining whether application of the securities laws makes sense. We are pleased that the Davidson-Soto bill and Director Hinman’s speech both indicate a willingness to support the growth and development of the public blockchain ecosystem.

What’s next?

Like all legislation in the early stages, we expect this bill isn’t perfect yet. However, what excites us is that it was proposed by a bipartisan team, demonstrating a vision for innovation and responsibility that is shared across the aisle. With the new Congress starting in January, we hope digital tokens will be an idea that we can build upon. We want to work together to debate the key issues, ensure adequate consumer protection, and work toward advancing legislation that represents our collective views.

As members of the Blockchain Association, we applaud this bill, Reps. Davidson and Soto, and all who join us in paving the way for the next generation of financial services and technology.