Digital asset legislation proposed in the U.S. could potentially classify non-native tokens as securities.
The CLARITY Act, a bipartisan bill introduced by House Financial Services Committee Chair French Hill, aims to provide clarity in the regulation of digital assets. Developed in conjunction with the House Committee on Agriculture, the Act seeks to update the definition of an "investment contract" in the Securities Act and other legislation.
The Act defines digital commodities broadly as assets recorded on a cryptographically secured distributed ledger that may represent value, utility, or rights but are not securities. It creates a regulatory framework that classifies digital assets primarily as either digital commodities or securities based on the maturity and decentralization of their underlying blockchain systems.
Two high-profile utility token issuers, Uniswap and Ondo Finance, have recently launched their own blockchains, adding to the growing number of projects in the digital asset space. Under the CLARITY Act, mature, decentralized blockchain-based tokens are treated as digital commodities regulated by the Commodity Futures Trading Commission (CFTC), while tokens with securities characteristics fall under the Securities Exchange Commission (SEC) jurisdiction.
Primary sales of digital commodities that meet certain conditions may be exempt from securities laws. These conditions include being US-based, having been in circulation for at least four years, having a total issuance in the previous 12 months of $75 million or less, and ensuring no single coin holder owns more than 10% of the token.
The CLARITY Act also includes provisions for the registration of digital commodity brokers, dealers, and exchanges with the CFTC. It ensures investors have the right to choose to self-custody their assets.
The Act excludes digital assets from being presumed securities solely because they provide voting or economic rights related to a blockchain’s governance or have value that can fluctuate based on blockchain system performance. It also clarifies what is not a security but potentially a digital commodity or other asset class, including virtual land, video game assets, and loyalty points.
Regarding safeguards against projects gaming the rules to classify tokens as digital commodities, the CLARITY Act incorporates measures that focus on the "maturity" and decentralization of the blockchain system, ensuring only mature, sufficiently decentralized projects qualify as digital commodities. It also excludes tokens that resemble securities or possess securities-like characteristics, maintaining the core integrity of securities laws.
The bulk of the supervision responsibilities for the CLARITY Act will rest with the CFTC, while the Securities Exchange Commission will also play a role in implementing parts of the rulemaking for the Act. The CLARITY Act has garnered support from five Republican co-sponsors and three Democrats, indicating a broad consensus on the need for clarity in digital asset regulation.
- The CLARITY Act, under consideration, aims to define digital assets as either digital commodities or securities, focusing on the maturity and decentralization of their underlying blockchain systems.
- Uniswap and Ondo Finance, recent blockchain launchers, may be treated as digital commodities if their tokens meet the criteria set by the CLARITY Act, which primarily regulates digital commodities by the Commodity Futures Trading Commission (CFTC).
- The CLARITY Act introduces conditions for primary sales of digital commodities that may be exempt from securities laws, including being US-based and having a total issuance in the previous 12 months of $75 million or less.
- The Act proposes the registration of digital commodity brokers, dealers, and exchanges with the CFTC, while ensuring investors have the right to self-custody their assets.
- The CLARITY Act presents provisions for the exclusion of certain assets from being considered securities, such as virtual land, video game assets, and loyalty points, broadening the definition of digital commodities and other asset classes beyond just stablecoins and utility tokens.
