As the CLARITY Act languishes in the United States Senate, the US Securities and Exchange Commission is moving forward to enact regulations for cryptocurrency investments based on existing law. The commission will soon publish “Regulation Crypto Assets” in the federal register for public commentary, preluding finalization of the proposed rules.
The new regulations could create two classes of exemptions for crypto investments in regard to standard registration requirements for investments and a new classification for crypto assets. The rules might also establish a new designation for firms who deal in crypto assets which could preempt existing standards.
SEC announces regulations for crypto assets
A Tuesday press release from the Securities and Exchange Commission (SEC) lays out the motivation for the new rules. The SEC has proposed the rules to “create a clear and fit-for-purpose framework for certain investment contracts involving crypto assets.”
An attached fact sheet lays out the aims of the new regulation. The overarching objective is to establish separate standards for cryptocurrency investments.
- A “startup exemption,” which would exempt offerings of up to $5 million from the registration requirements of the Securities Act of 1933 during a four-year period.
- A “fundraising exemption,” which would exempt offerings of up to $75 million from the registration requirements of the Securities Act during each 12-month period.
- An “investment contract safe harbor,” which would provide a conditional safe harbor from the term “investment contract” in the definitions of “security” in the Securities Act and the Securities Exchange Act of 1934.
- A definition of “qualified purchaser” for purposes of the Securities Act, which would preempt state securities law registration and qualification requirements with respect to offers and sales of covered investment contracts issued pursuant to Regulation Crypto Assets, as well as certain secondary market transactions.
As the proposed rule itself states, these new designations follow up on expansion of the SEC’s interpretation of “security” to include cryptocurrency transactions. If Congress can’t move the CLARITY Act forward, the SEC’s guidance on these matters will be the highest authority.
SEC regulations try to fill legislative void
The CLARITY Act’s chances of becoming law in the current Congress are slim, as Congress is in recess until Sept. 14, and that marks the start of an activity period during which many members of both chambers will be focused on reelection bids. Congress members held a July field hearing to try to drum up support for the legislation in the US Senate, but that failed to muster the necessary support prior to the beginning of the current recess.
The bill could see debate on the Senate floor upon adjournment of the recess, as Senate leadership filed a cloture motion for it before recess. However, there still aren’t sufficient votes to suspend the rules and pass the bill.
Even if every Republican in the current Senate voted for the bill, the legislation would still need at least seven Democratic senators to vote with them to suspend the rules. Democratic senators such as Adam Schiff (California) and Elissa Slotkin (Michigan) have raised objections over the lack of ethics provisions in the legislature and other matters while Republican senators such as Thom Tillis (North Carolina) have also voiced opposition to the bill.
It’s amid this landscape that the SEC is moving forward with drafting rules for crypto investments, as further or new guidance from Congress seems unlikely to appear anytime soon. By the time the commentary period on this proposed rule ends, the November midterms will have taken place, and the SEC will have an even clearer picture of whether it will need to continue to take on a more active role in regulating cryptocurrency assets.
