Under bipartisan legislation introduced last week, titled the Responsible Financial Innovation Act, certain digital assets would be classified as commodities and empower the Commodity Futures Trading Commission to regulate the industry.  The bill’s sponsors characterize the legislation as a critical first attempt to structure the markets for digital assets with long-awaited legal definitions. The traditional Howey test for determining whether a transaction qualifies as an “investment contract” and thus, a security subject to security disclosure and registration would be codified under the bill.   The bill designates most digital currencies as “ancillary assets,” or intangible, fungible assets that are offered or sold in tandem with a purchase and sale of a security.  Those ancillary assets would be treated like commodities under U.S. law and fall under the jurisdiction of the CFTC.  Cryptocurrencies and other digital coins won’t be treated like traditional securities under the SEC’s scrutiny unless the holder is entitled to the privileges enjoyed by corporate investors like dividends, liquidation rights or a financial interest in the issuer.  Final legislation is not expected in the short term but this legislation represents an important first step towards a clearer regulatory framework for crypto.

Winget, Spadafora & Schwartzberg, LLP is closely monitoring these developments.  Any questions can be directed to our Securities Litigation Practice Group at 212-221-6900.