Lawmakers Introduce Bill to Exempt Cryptocurrencies from Securities Laws

Proposed legislation aims to provide light-touch regulatory guidance for digital tokens.

Two members of the US House of Representatives have introduced bipartisan legislation that would provide regulatory guidance for cryptocurrencies and exclude them from being defined as a security under the law.

The Token Taxonomy Act seeks to “exclude digital tokens from the definition of a security,” and “to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography,” according to the text of the bill, which was introduced by Reps. Warren Davidson (R-Ohio) and Darren Soto (D-Florida).

The bill also calls for the adjustment of taxation of virtual currencies held in individual retirement accounts, and the creation of a tax exemption for exchanges of one virtual currency for another, among other provisions.

“In the early days of the internet, Congress passed legislation that provided certainty and resisted the temptation to over-regulate the market,” Davidson said in a statement. “Our intent is to achieve a similar win for America’s economy and for American leadership in this innovative space.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

The congressmen said the legislation “draws a bright line” for businesses and regulators by defining a “digital token” and clarifies that securities laws do not apply to companies that use blockchain once they reach their goal of becoming a functional network. They also said that implementing the bill will help stop the spread of fraud.

They argue that a “patchwork of judicial rulings and conflicting state initiatives” has clouded certainty for companies involved in this space and is motivating market players to leave the US for certainty provided in markets in other countries.

The bill is also intended to clarify the 1946 Supreme Court case SEC v. Howey that the SEC has been using to determine what is considered a security. The so-called “Howey Test” has been used to establish whether certain transactions qualify as “investment contracts.” If so, then under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and are therefore subject to certain disclosure and registration requirements.

According to the SEC, an investment contract exists if a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.

In September, Davidson hosted a roundtable discussion with representatives from Wall Street, venture capital firms, and the cryptocurrency industry for input in drafting the legislation. Davidson has criticized the regulatory framework in the cryptocurrency space as “sloppy”.

“While this legislation is a great first step, we are looking for feedback,” said Soto in a statement. “The Federal Trade Commission (FTC) has a history of policing web services, while the Commodities Futures Trading Commission (CFTC) has authority over commodity derivatives. To what extent does the jurisdiction of the FTC apply to digital tokens? Can we address this issue in this legislation or will we need subsequent legislation to effectively regulate this emerging sector?”

Tags: , ,

SEC Charges Audit Firm in Failure to Detect Unpaid Taxes

Crowe LLC let $100 million in unpaid taxes slip under its radar, SEC alleges.

The Securities and Exchange Commission (SEC) settled charges against audit firm Crowe LLC for $1.5 million on December 21, as a result of its investigation against the firm, two of its partners, and two partners of a now-obsolete auditing firm, after it was discovered the parties failed to detect approximately $100 million in unpaid federal payroll tax liabilities from one of its clients, Corporate Resource Services Inc. (CRS), in 2013.

CRS filed for bankruptcy in 2015 after the discovery, leading the SEC to file specific charges against Crowe for failing to fulfill its responsibilities in auditing the firm. The SEC found that Crowe did not include procedures designed to detect CRS’s undisclosed payroll tax obligations, properly identify and audit the company’s related-party transactions, and other concerns.

The SEC also found that Crowe had a continuing direct business relationship with CRS, subsequently breaching mandatory independence obligations.

Crowe agreed to pay the $1.5 million penalty, according to a statement from the SEC, and retain an independent compliance consultant to review its audit policies and procedures. Several individuals were brought into the settlement case as well, including engagement partners Joseph Medina, Mitchell Rubin, and Michael Bernstein, who each agreed to pay a respective penalty surmount to $25,000 each. Third-party engagement quality reviewer Kevin Wydra also agreed to pay a $15,000 penalty. The four individuals also are not permitted to participate in the financial reporting or audits of public companies for a short period of time.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

“The audit standards are designed to ensure that public accounting firms have reasonable procedures to identify and respond to illegality and issues that pose material risks to the integrity of an issuer’s financial statements,” said Anita B. Bandy, associate director in the division of enforcement. “As set out in our order, the pervasive audit failures of Crowe and these accountants left investors with a misleading picture of Corporate Resource Services’ financial condition.”

Crowe did not respond to questions by press time.

Tags: , , ,

«