Soon-to-be Reintroduced Token Taxonomy Act can Add Clarity to Crypto Industry

American cryptocurrency market needs to compete with Europe and other growing blockchain technology part of the world. New regulations come out almost every day and the US must be up to this.
Token Taxonomy Act

Token Taxonomy Act would revise the Securities Exchange Act.

The long-awaited “special” Securities Act could finally seem to arrive in its launch in the US, thus give the biggest economy the chance to make up leeway since European regulators are a step forward on the market of blockchain economies.

German regulator BaFin (German Federal Financial Supervisory Authority) has just approved Germany’s first security token offering, while Luxembourg has passed a bill that provides the same status and legal framework for securities issued using blockchain technology as traditional securities.

Digital tokens are a new asset class which calls out for definition and regulation.

US Republican congressman Warren Davidson says that the proposed Token Taxonomy Act will change the Securities Act of 1933 and Securities Exchanges Act of 1934 and the definition of security where digital tokens will no longer be considered as securities. To put it in simple words: The Act should exempt all crypto transactions from the current law.

Objection on Token Taxonomy Act

No question that ICOs (Initial Coin Offering) have come to an end but in parallel, the rise of STOs (Security Token Offering) are just happening. Currently, an ICO in its core design is a security exchange but in spite of this, the token itself is not security since no rights of dividend linked to them. The problem is that most fraudulent activities are connected to ICOs in thecryptospace because this way they are not under the current Token Taxonomy Act, so SEC is not able to regulate[1] them.

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Different tokens should be determined differently and only certain token transactions should be considered as securities exchanges. The new bill proposes precisely this. If it succeeds, costs will be much lower for consumers and investors, while protection gets higher levels and the transactions will be treated more straightforwardly.

Congressmen Warren Davidson and Darren Soto Introduce New Token Taxonomy Act

The Token Taxonomy Act intends to provide a transparent regulatory environment for businesses in the blockchain environment.

Some securities specialists say that the proposal does not make enough sense to change the game, that’s why not mature enough to become law.

SEC Chairman Jay Clayton is not to accept any changes in the traditional act since ” traditional securities has been working well for a long time.” It is not startling news as Chairman Clayton[2] stated back in 2018 that “I believe every ICO I have seen is a security”.

Previous Bill “The Token Taxonomy Act”

“Token Taxonomy Act”[3] bill was proposed by Republican Representatives Darren Soto and Warren Davidson in late December last year. It defines a digital token and determines that securities law would not apply to cryptocurrencies.

In case of this bill is going to be a law, all tokens would be under the control of CFTC or Federal Trade Commission, and the Internal Revenue Service (IRS) will be able to impose new taxes and adjust them on digital assets and also can create tax exemption for exchanges of one cryptocurrency (token) for another one. Both the House and Senate must pass this bill and then be signed by the President himself to become law.

What is a Security?

The Supreme Court in the US created a method called The Howey Test to determine if something is a security or not. 4 different factors should be met for an instrument to be considered as a security:

  • A person or institution invest money into it
  • The money will end up in a ‘common enterprise’
  • Profit is expected
  • Profit comes from the efforts of the promoter or a third party. We can see that most crypto transactions would qualify for being security.

What is a Token and Tokenization?


Tokenization is a process that converts rights to an asset into a digital token.

The Token Taxonomy Act bill contains a clear definition of what a token is. It has to meet a few requirements such as the creation method of the token, which means the token must be created “in response to the verification or collection of proposed transactions” or “pursuant to rules for the creation and supply that cannot be modified by a single person or group of persons” and “as an initial allocation of that will otherwise be created in accordance with” the before mentioned.

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Secondly “a Digital Token has a transaction history that is recorded in a distributed, digital ledger in which consensus is achieved through a mathematically verifiable process; and after consensus is reached, cannot be materially modified by a single person or group of persons.” Basically, it refers to mining.

Furthermore, concerning the transactions “a Digital Token is capable of being traded or transferred between persons without an intermediate custodian” and “is not a representation of a financial interest in a company, including an ownership or debt interest or revenue share.”

So, anything that has real-world value can be incarnated in a token; we call it merely “tokenization.” Tokenization will allow investors to buy into even a small fraction of an asset. Real-estates, diamonds, gold. Companies can also issue tokenized equity, from which investors as token holders will receive dividends, vote and participate in the company’s goals.

Read Next: Security Tokens: Here’s What You Need To Know


This bill will not solve all issues in the crypto industry especially in various token offerings but something at least has started off and more actions are probably follow since at this time this bill will actually not make it into law.

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The writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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