Senate Bill Would Offer Safe Harbor for Crypto Exchanges

A new proposal would offer cryptocurrency exchanges a safe harbor for listing tokens that might be securities.

Draft legislation by Senate Banking Committee member Bill Haggerty (R-Tenn.), would complement other proposals for a regulatory sandbox intended to allow blockchain and cryptocurrency developers to experiment with build tokens that might otherwise be securities.

It would create a two-year safe harbor for exchanges that list tokens at the point that they are deemed by the Securities and Exchange Commission (SEC) to be unregistered securities, according to The Block, which saw an advance copy of the bill to be released shortly. Nor would exchanges face legal action for failing to register as broker-dealers or national security exchanges during that period.

It isn’t a theoretical problem. The SEC is reportedly investigating top U.S crypto exchange Coinbase for listing unregistered securities — something that came to light when the SEC and Justice Department filed an insider trading complaints against a former Coinbase manager.

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Haggerty’s bill would effectively cover all exchanges, as SEC Chairman Gary Gensler has repeatedly said that virtually every cryptocurrency other than bitcoin is a security. Although he has not said it explicitly, that likely includes the No. 2 cryptocurrency, smart contract platform Ethereum, upon which the majority of decentralized apps and blockchain programs are built.

Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam has said that Ethereum — and possibly other tokens — is not a security as its main use and value is as for making transactions rather than speculation. That means, in the industry’s terminology, ether is a utility token rather than a security token.

Haggerty’s bill would not prevent the SEC from calling tokens securities or launching enforcement actions against their developers, but it would give the CFTC the ability to object. And coin issuers would also be able to sue to block the SEC’s action, as cross-border payments firm Ripple is doing.

Read also: SEC’s Setback in Ripple Suit Adds Pressure to Define Crypto Assets

Working Together

Haggery’s bill would essentially complement other proposals to create such temporary exemptions for cryptocurrency developers, making it easier for them to sell tokens issued in their own safe harbor. Chief among these is SEC Commissioner Hester Peirce’s 2020 proposal for a three-year safe harbor that would allow blockchain developers time to build their projects to the point that they would no longer qualify as securities.

See more: CFTC’s Chair: Crypto and DeFi Have Outgrown Sandbox

That has seen strong support from some members of Congress who want make it easier for digital asset developers to innovate.

These include Patrick McHenry (R-N.C.) the ranking minority member of the House Financial Services Committee, who has engaged heavily on the topic, most recently by working with the chairwoman, Maxine Waters (D-Calif.) on a stablecoin regulation bill.

Peirce’s bill, he said last year, “will allow entrepreneurs seeking to build decentralized networks in which a token serves as a means of exchange or provides access to a function of the network to get the tokens into the hands of other people.”

The point of Sen. Haggery’s bill is that would be hard if exchanges fear selling those tokens.

Two other bills that would impact this issue crypto regulatory proposals in the Senate: Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand’s (D-NY) Responsible Financial Innovation Act, and another coming out of the Senate Agriculture Committee that would both give the CFTC more authority over cryptocurrencies.