Congressmen Introduce Legislation to Define “Digital Token” Under the Securities Laws
On December 20, 2018, two congressmen introduced the “Token Taxonomy Act” (H.R. 7356) before the 115th Congress in an effort to define “digital token” under the federal securities laws. H.R. 7356 was introduced by Rep. Warren Davidson (R-Ohio) and Rep. Darren Soto (D-Florida) and seeks to clarify that the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) would not apply to cryptocurrencies if they meet a new definition of “digital token” that H.R. 7356 would add to the Securities Act. H.R. 7356’s definition of “digital token” encompasses decentralized tokens that are not a representation of a financial interest in a company (i.e., equity, debt, or revenue share).
H.R. 7356 also makes several changes related to the custody of “digital tokens.” For instance, H.R. 7356 adds the phrase “provides custodial services” to the definition of “bank” under both the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 , which in turn could affect potential “qualified custodians” for digital tokens under the Custody Rule (Rule 206(4)-2) of the Advisers Act. H.R. 7356 also instructs the U.S. Securities & Exchange Commission (“SEC”) to amend Exchange Act Rule 15c3-3, which addresses the custody of securities by broker-dealers, by asserting that a broker-dealer’s requirement to maintain a satisfactory control location for clients’ digital assets is fulfilled through public key cryptography and following commercially reasonable cybersecurity practices. Finally, H.R. 7356 would direct the Internal Revenue Service to address the taxation of cryptocurrencies resulting from certain exchanges of virtual currencies.
H.R. 7356 has been referred to both the House Committee on Financial Services and the House Ways and Means Committee; however, the 115th Congress will formally come to a close on January 2, 2019 and any legislation still pending would need to be reintroduced before the 116th Congress for renewed consideration.