Why Washington won’t spoil crypto’s SEC victory

When Paul Atkins, chair of the Securities and Exchange Commission, announced this week that his agency had created a “token taxonomy,” he cautioned that Congress would be needed to “future-proof” the landmark step in US crypto regulation.

After all, regulators come and go with every presidential election. Laws, however, are much harder to change.

That means forthcoming market structure legislation could rain on crypto’s parade if it were more restrictive than the SEC’s token taxonomy, which was met with universal acclaim in crypto circles when it was announced on Tuesday.

But Cody Carbone isn’t worried.

The SEC and congressional leaders currently negotiating market structure legislation are “very aligned,” Carbone, the head of crypto advocacy group the Digital Chamber, told DL News.

“The SEC has been providing technical assistance to Congress as they draft this bill every step of the way, and a lot of what the bill would do would be directing the SEC to release guidance like this,” he said.

“I don’t see any opportunity for Democrats to say, ‘Oh, we didn’t agree with what the SEC did.’”

Détente

Senators are racing to finalise key provisions of market structure legislation known as the Clarity Act. Aptly named, the purpose of the bill is to clarify when a crypto asset is subject to SEC purview, and when it is subject to CFTC purview.

Regulators from both agencies have long claimed jurisdiction over crypto markets, though Atkins and his employee-cum-peer, CFTC Chair Mike Selig, have committed to working in tandem to “help unlock the full promise of these innovations,” as Selig put it during an appearance at an industry conference in Washington, DC this week.

“For too long, the two agencies have been unable to work together on basic things like definitions, interpretations,” Selig said. “[The SEC’s] burying the hatchet with the CFTC, I think this started months before I came into office at the CFTC, but we’re going to continue the effort.”

The token taxonomy is, perhaps, the most significant product of this détente. Technically speaking, it is an interpretation of federal securities laws that lays out rules for issuers of virtually all crypto assets.

It creates four categories of non-security crypto assets — digital commodities, digital collectibles, digital tools, and payment stablecoins — though their issuers may be required to follow federal securities laws under certain circumstances.

Only one type of crypto asset, tokenised securities, automatically falls under SEC purview according to the agency’s interpretation of securities laws.

The interpretation received universal acclaim from the industry.

“To really appreciate how momentous this is, you have to have lived through the Gensler years, which I did,” Steve Yelderman, general counsel at Etherealize, told DL News, referring to Gary Gensler, the SEC chair that preceded Atkins.

“I was litigating at Coinbase against the SEC and we were, like, literally begging for guidance.”

Carbone agreed.

“Now, if you’re going to issue a token in the United States, you know who your regulator is. You know what you need to do to be properly regulated,” he said.

“There is no more guessing. There is no more finding your token in an enforcement action, being listed as a security or listed as a commodity when you didn’t expect that. It’s what we’ve been asking for for so long, so to see that come out here yesterday was incredible.”

‘Close to perfect’

The guidance wasn’t just useful because it was clear, though. It was also very friendly to crypto entrepreneurs.

“This is as close to perfect as I could have imagined,” Carbone said.

Under Gensler, the SEC alleged in lawsuits that major cryptocurrencies were securities, a classification that comes with enormous responsibility for an asset’s issuer.

The agency’s guidance this week specifically noted that Bitcoin, Ether, Solana, XRP, Doge, and other major cryptocurrencies would be treated as digital commodities.

The 68-page guidance document published by the SEC contains dozens of details that crypto attorneys will surely scrutinise over the coming weeks. So far, Yelderman likes what he’s seen.

“One of the things that this guidance does really well is give examples of how you could have an investment contract that then ends,” Yelderman said — in other words, when the person or company behind a non-security crypto asset is free of their obligations to the SEC.

For example, an entrepreneur might raise money through an initial coin offering to build a specific crypto product. The tokens that entrepreneur sold might be subject to securities laws, according to the SEC. But that could end once the entrepreneur has delivered on his or her promises.

“It’s a really simple example, but it was something that the prior SEC struggled to articulate as a possibility,” Yelderman said.

Despite their excitement over the SEC’s guidance, crypto advocates say market structure legislation is still necessary.

“It’s unacceptable to me that they won’t be able to find consensus and get a bill done,” Carbone said.

“If we don’t get a bill done, then you’re not making policy permanent. You’re leaving it up to elections, and you’re leaving it up to the future administrations. You don’t want that. It doesn’t give the founders any clarity.”

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at aleks@dlnews.com.