Lawmakers in the US House of Representatives have introduced a new crypto market structure bill, dubbed the Digital Asset Market Clarity (CLARITY) Act, aiming to end the Securities and Exchange Commission’s (SEC) oversight over the industry and create a clear legal pathway in the country for most digital assets.
CLARITY Act Defines Crypto Assets Issued on a Blockchain System as ‘Digital Commodity’
The legislation closely resembles a draft bill released by the House Financial Services Committee earlier this month. It would amend federal securities laws to exempt most top crypto assets from being classified as securities, thus ending the SEC’s regulatory oversight.
The CLARITY Act would add key language to the Securities Act of 1933 and Securities Exchange Act of 1934, formally excluding “digital commodities” from the definition of security. The document states that any digital asset that is “intrinsically linked to a blockchain system” should be considered a digital commodity as long as it is used to transfer value between participants in the blockchain system.
A digital commodity should derive its value from the said system, and offer voting rights in a decentralized governance system, or be used to validate transactions on the blockchain ecosystem. Furthermore, under the CLARITY Act, the secondary market trading of the digital commodities would be exempt from SEC regulations if the assets in question are certified by the securities watchdog as having originated from a “mature blockchain system.”
This definition is broad enough that it covers virtually all crypto assets, including popular ones such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Solana (SOL), Cardano (ADA), XRP, and Dogecoin (DOGE), as well as the so-called governance tokens like World Liberty Financial’s WLFI token.
The Bill Puts the CFTC In Charge of Regulating the Crypto Market
The bill defines a mature blockchain system as a network that allows its users to execute on-chain transactions, access on-chain services, operate nodes, and validate transactions. It must be open-source and available for public use, automated, and cannot be shut off or altered by a single person or entity, unless its control is taken over in the name of cybersecurity or maintenance.
It also states that no single person or entity can “beneficially own” more than 20% of the total supply of a token issued by the system.
The earlier-mentioned exemption for secondary transactions for digital commodities issued by mature blockchain systems would not apply if the transactions involve purchasing an ownership interest in the “revenues, profits, or assets of the issuer.” This means tokens issued by institutionally controlled blockchains will be considered digital securities.
The CLARITY Act states that any digital asset that falls under the definition of a security or a security derivative should not be considered a digital commodity. However, it does not clarify how regulators or courts should determine when an asset that otherwise meets the definition of digital commodity should instead be categorized as a security asset.
The bill puts the Commodities Futures Trading Commission (CFTC) in charge of regulating crypto assets recognized as digital commodities, instead of the SEC.
America’s securities laws do not contain language exempting certain assets based on their technological composition, and experts are warning that adding such language to a long-standing legislation that has been governing the country’s financial markets since the wake of the Great Depression could be chaotic and potentially spill over into traditional finance.
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Institutional Tokens Issued Before CLARITY Act’s Passage Could be Exempt from Security Laws on a Case-by-Case Basis
Questions also remain about cryptocurrencies like XRP, which is developed by Ripple Labs, with the company controlling more than 20% of its supply. This means that secondary trading of XRP may not be exempt from securities laws. Most of the tokens held by Ripple are in escrow, which may or may not meet the bill’s definition of “beneficial ownership.”
However, cryptocurrencies like XRP, which were issued before the passage of the CLARITY Act, could still be exempted by regulators on a case-by-case basis even if they only meet some of the criteria of being a mature blockchain system.
The legislation proposes relaxing certain restrictions on institutional digital asset issuers once they register themselves as a certified mature blockchain system, including the ability for token founders and institutional holders to freely sell the asset on the secondary marketplaces.
The Republican-steered CLARITY Act, which gained bipartisan House support and has three Democratic co-sponsors, will go before the House Financial Services Committee for a full markup hearing on June 10.
In a statement, Rep. Bryan Steil (R-WI), chairman of the Committee, said the bill ensures that financial innovation and development of digital assets occur in the United States, and secures the country’s dominance in the field by democratizing the asset class, “unleashing” innovation, and protecting consumers from fraud.