April 23, 2021
The U.S. Congress Takes a Step Toward Legal Clarity for Crypto
When it comes to the law, nothing is more important than clarity, precision and unambiguity. James Madison, the $5000 founding father, kept it clear, writing, "It will be of little avail to the people if the laws are so voluminous that they cannot be read, or so incoherent that they cannot be understood." "Clear" is near and dear to generations of philosophers, politicians and jurists and is incorporated into so many of our democratic principles. Courts use the standard of "clear and convincing" to evaluate evidence and render decisions in the most serious civil cases and the "plain language doctrine" dictates that statutes are to be interpreted using the ordinary meaning of the language of the statute - an attempt to prevent courts from taking sides in legislative or political issues.
Clarity in legislation and regulation is most important in providing individuals and businesses a clear framework for them to freely engage in business and know that they are in compliance with the laws that govern them.
For the last several years, there has been a call to clarify legislation and regulation around cryptocurrency. States such as Wyoming have carefully built, through thoughtful legislation - 22 bills and counting - a legal framework to regulate digital assets and provide clarity to crypto businesses seeking to do business in the state.
The Wyoming legislation classifies digital assets as property within the context of the Uniform Commercial Code (UCC) allowing individuals and companies the right to own crypto without the need for intermediaries and removes barriers to asserting crypto legal rights. For banks, the law creates special blockchain depository institutions (SPDI) such as Kraken and Avanti that can provide basic banking services to blockchain and other businesses that might not have access to traditional banking services. The Wyoming law takes a supportive approach to crypto businesses expressly creating sandbox provisions that are great for innovation and experimentation.
In other words, Wyoming provides clarity for those that want to do business in the state. As Kraken Financial CEO David Kinitsky explained on TRM Talks Cowboys and Crypto, "Nothing was written down on paper for a regulatory framework with respect to digital assets until this," referring to Wyoming's laws. "But it doesn't stop there. It harmonizes with adjacent areas like the underlying commercial code. Imagine a world where you pass legislation and just say, hey, here's a regulatory framework for crypto and then you have all these fundamental legal issues that you haven't resolved. This environment is clear."
While states such as Wyoming are taking the lead in building clear and business friendly crypto-regulatory regimes, a state-by-state approach could potentially lead to a national patchwork of crypto rules. For example, New York is known as a tougher environment for crypto businesses with robust licensing requirements for its "Bitlicense" and recent enforcement actions. Even the federal regulatory landscape is scattered as the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN) provide guidance, interpret, and regulate without legislative clarity.
However, on Tuesday, the United States Congress may have taken its first step toward a federal regulatory framework for cryptocurrency when the United States House of Representatives passed H.R. 1602 — the Eliminate Barriers to Innovation Act — introduced by Rep. Patrick McHenry (R-NC). The bill seeks to bring together regulators from the SEC and the CFTC with private sector entities spanning the fintech and financial services spectrum.
The digital asset working group has a year to issue a report analyzing the current crypto regulatory landscape, the existing legal framework, and identifying areas where further clarity is needed. The panel’s work would also focus on matters like crypto custody, cybersecurity, private key management and investor protection concerns with the goal of seeking to clarify when the SEC has jurisdiction over digital assets, in the case of when they are deemed securities, and when the CFTC regulates them as commodities.
As the law goes to the Senate, one thing is clear. A concerted effort by legislators, regulators and industry to bring clarity to the cryptoverse is a first step toward the type of coherent legal narrative Madison was talking about. Things might just be clearing up.
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