Senate Bill Would Create a Two-Year Safe Harbor for Exchanges

The good news is more and more legislators are realizing the Securities and Exchange Commission and the Commodity Futures Trading Commission – the two bodies exercising regulatory authority in the crypto space – don’t have the tools to properly provide oversight for the industry, and that their current actions are doing more harm than good.

A bill that will be introduced today by US Sen. Bill Hagerty (R-TN), a member of the Senate Banking Committee, that would provide a safe harbor for cryptocurrency exchanges that are right now under threat from the SEC. This comes as other legislators are putting forth other bills that would protect the industry from stifling regulation.

The only bad news is that time is running out for such measures to be passed in this session. Still, it’s encouraging that more are seeing the urgency of addressing this issue.

While details won’t be available until late Friday, Hagerty’s bill is reportedly a stripped down version of former SEC Chair Hester Pierce’s Token Safe Harbor Proposal, The Block reports.

According to text of the bill obtained by The Block, the legislation would allow for a two-year grace period from enforcement actions by the Securities and Exchange Commission against crypto exchanges that list tokens deemed by the commission to be unregistered securities. The grace period would begin when the commission makes a determination that a token is an unregistered security. Exchanges would also not be subject to legal action for failure to register as a broker-dealer or national securities exchange during the grace period.

The bill is expected to become public tonight. 

If the bill were to become law, the SEC could still label tokens as unregistered securities through statements, enforcements, or rulemakings, though the Commodity Futures Trading Commission would have the right to object. The exchange could also still sue for an appeal of the decision in court, where a judge would determine the security definition.

CFTC Chair Rostin Benham has pushed for more direct authority over digital assets, while SEC Chair Gary Gensler wants to keep his agency in point position on the asset class, continuing a longstanding argument by the SEC that most crypto tokens are securities offerings. Bottom of Form

…

Under terms of the bill, exchanges listing tokens determined to be securities would have to register as broker-dealers or national securities exchanges. To prevent interruption of services, they would also be required to enter agreements with other broker-dealers or banks to maintain operations if the SEC labels a listed token as a security.

It may not be as comprehensive as Pierce’s Token Safe Harbor Proposal 2.0,  but it’s a start. Pierce’s proposal would create a three-year safe harbor period in which developers would be allowed to distribute tokens to facilitate the development of a decentralized network, exempt from the registration requirements of the federal securities laws. This exemption was predicated on developers meeting certain conditions. It calls for a mandatory exit evaluation at the end of the safe harbor period by outside counsel, who would analyze the network and determine if the network is decentralized or functional. Those products that are deemed neither would be designated a security and the developer would need to register it as one.

It’s good to see common sense gaining traction in Washington. The industry needs to keep pressure on to open up a space for crypto to continue to grow.