Senate Unveils Preliminary Crypto Market Structure Bill

The Senate yesterday unveiled a preliminary draft of its crypto market structure legislation—a companion bill to the House’s sweeping CLARITY Act passed last week with bipartisan support. While there are differences, a common theme emerges: crypto startups may soon have a legal path to raise funds through ICOs like never before.

Overview of the Bill

The bill released earlier this week by the Senate Banking Committee primarily tackles securities and the SEC. The other half, related to commodities and the CFTC, is expected from the Senate Agriculture Committee in the coming months.

Overall, the securities-focused section of the bill aims to achieve many of the same outcomes as the House’s CLARITY Act. It plans to amend New Deal-era securities laws to formally carve out crypto and shift oversight from the strict SEC to the more lenient CFTC.

Intent of the Legislation

The Senate bill’s language is nuanced, allowing both the SEC and CFTC some discretion in interpretation and rulemaking, but the goal remains clear: to enable crypto businesses to focus on token sales and raise startup capital without regulatory fears.

A GOP Senate aide stated, “We want to reduce legal barriers to entry.” The aide emphasized the need for typical crypto projects to avoid exorbitant legal costs to determine whether they’re classified as a commodity or security.

Compared to the CLARITY Act

The Senate bill is more concise and less aggressive than the CLARITY Act (only 35 pages compared to the House’s 168). It proposes pathways for token issuers to fundraise up to $75 million annually for four years via token sales, provided such tokens don’t confer security-like benefits (e.g., voting rights, liquidation rights).

If a token meets these criteria, it can be classified as a non-security “ancillary asset,” falling outside SEC jurisdiction. This framework previously stemmed from the Lummis-Gillibrand bill, which never saw a vote.

Tokens that initially fail to meet the criteria could later qualify if they can show minimal entrepreneurial input that influenced their value for a year.

Industry Perspectives

Drew Hinkes, a partner at Winston & Strawn, noted this framework represents an attempt to balance facilitating easier token issuance while avoiding interference with traditional markets. “The SEC needs to create opportunities for lower-friction token issuances with traditional market risks in mind,” Hinkes explained.

Opinions within the industry vary about the legislation’s effectiveness. One crypto policy leader commended the Senate’s straightforward approach compared to the House’s complex set of rules.

Potential for ICOs

Will the Senate bill lead to a resurgence of ICOs? Amanda Fischer, policy director at Better Markets, believes it will, albeit without the clear certainty many crypto advocates desire. She viewed the CLARITY Act as a more explicit exemption for the crypto industry compared to the cautious approach adopted by the Senate.

One clause in the Senate bill restricts SEC-exempt tokens from offering “express or implied financial interest.” This raises questions about governance rights and the implications for token pricing linked to issuer stability.

Fischer pointed out concerns, asserting, “There are a ton of tokens that would meet that bill.”

The GOP aide attempted to downplay differences between the Senate’s draft and the House’s CLARITY Act. Both aim to ensure that assets sold in investment contracts are generally not considered securities.

Future Guidance and Rulemaking

The aide added that clarifications regarding which types of crypto tokens qualify as securities will be addressed by SEC and CFTC rulemaking post-passage. The legislation recognizes that there will be edge cases, which will evolve through guidance and exemptive relief.

Senator Fischer noted that the Senate bill’s less aggressive stance could ease concerns among Senate Democrats about potential impacts on traditional securities markets. However, this may also unintentionally hinder SEC enforcement against crypto companies and token issuers in the future.

Ultimately, Fischer concluded, “The SEC is going to be on its back foot,” making enforcement significantly more challenging due to the higher thresholds needed for legal action.