Preemption of inconsistent state laws

In these hyper-partisan times, any bill that includes sponsors from both sides of the aisle is noteworthy. There is one pending now that is particularly important in the crypto space. On March 8, 2021, H.R. 1628, the Token Taxonomy Act of 2021, was introduced by representative Warren Davidson. It was co-sponsored by representatives Ted Budd, Darren Soto, Scott Perry and Josh Gottheimer.

Terms of the Token Taxonomy Act of 2021

Among other provisions, the bill would exempt “digital tokens” from the definition of security, and it would also preempt inconsistent state regulation. Crypto assets would need to meet certain specified requirements in order to count as “digital tokens” under this act:

  • First, the interest must be created either in response to the verification of proposed transactions, or pursuant to rules for creation that cannot be altered by any single person or persons under common control, or “as an initial allocation of digital units that will otherwise be created in accordance” with either of the first two options.
  • Second, the assets must have a transaction history recorded in a distributed digital ledger or data structure on which consensus is reached via a mathematically verifiable process.
  • Third, after consensus is reached, the transaction record must resist modification by any single person or persons under common control.
  • Fourth, the interest must be transferable in peer-to-peer transactions, and fifth, it cannot be a representation of a conventional financial interest in a company or partnership.

Davidson has explained that the purpose of the bill is to improve regulatory clarity. In addition, in an interview, he suggested that if the bill had been passed in prior years, “it could have forestalled enforcement actions such as the Security and Exchange Commission’s (SEC’s) suit against Ripple Labs.” This comment examines in more detail how the bill might actually play out with regard to certain forms of crypto.

How would Bitcoin fare?…

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