The Token Taxonomy Act has been reintroduced to the United States legislature. If approved, it
would exempt cryptocurrencies from being regarded as securities while also
providing clear regulations to the crypto space.
However, there are some who don’t
believe that this bill would lead to proper regulation. One of such
personalities is Jake Chervinsky, a leading cryptocurrency legal expert.
Token Taxonomy Act Would Create More Regulatory Uncertainty
Chervinsky, one of the leading
cryptocurrency legal experts argued against the approval of the token taxonomy
bill. The legal expert pointed out that even though he is in support of crypto
regulation, he believes this bill would create more regulatory uncertainty.
According to Chervinsky, the Securities Act of 1933 & the Securities Exchange
Act of 1934 which the taxonomy bill is seeking to amend, requires security
issuers to register with SEC before any public sale. The law stipulates that if
a company issues a security without disclosing it first (or satisfying an
exemption from registration), it would be prosecuted by SEC since it violates
Securities Acts 5 & 12.
This is important because
cryptocurrencies can be regarded as investments contracts, which is a type of
security. He pointed out that when put to the Howey test, cryptocurrencies could
be considered as investment contracts. Chervinsky stated that “there’s no way to be sure if a particular
token will pass the Howey test. Reasonable minds can differ on the test’s
Chervinsky clarified that the token
taxonomy bill doesn’t have any effect on the tokens already in circulation.
Howey Test Provides More Clarity Than Token Taxonomy Act
The token taxonomy act seeks to
clarify this problem by defining a new class of digital tokens and removing
them from the scope of securities. If that happens, then digital currencies
won’t have to worry about the Howey test. Instead, they would focus on
satisfying the conditions of the token taxonomy bill.
However, Chervinsky pointed out that
it would only work if the taxonomy act provides regulatory clarity. At the
moment, the law hasn’t offered that, thus, making it easier for tokens to
satisfy the Howey test over the taxonomy act. He adds that while the Howey test
has some shortcomings regarding the exact state of tokens, it is something that
has been used for decades.
Meanwhile, the token taxonomy act
contains some elements that are hard to apply. Chervinsky said, “on the other hand, the TTA’s digital token
definition has several new elements that are just as hard to apply (if not more
so) & lack a solid basis in existing jurisprudence. This isn’t the best
recipe for statutory clarity.”
The legal expert revealed some
definitions that are hard to apply, citing one as saying “tokens are required
to be recorded on a data structure that resists modification or tampering.” He
insists that this is a broad definition since the most centralized
non-blockchain databases resist tampering.
Chervinsky adds that he doesn’t think
the token taxonomy act will resolve any of the uncertainty around the Howey
test. If it is approved, then it would take years of litigation to understand
how it works. He added that he is not the only lawyer to criticize the token
taxonomy act, citing other lawyers such as Caitlin Long, Gabriel Shapiro, and