A close look at the token definitions in the proposed bill.

Disclaimer: Nothing here should be considered legal or investment advice.

On Thursday, a bipartisan bill was introduced by Warren Davidson, R-Ohio and Darren Soto, D-Fla. It’s a great step to providing some much needed regulatory clarity to crypto tokens and blockchain projects.

“This bill provides the certainty American markets need to compete with Singapore, Switzerland, and others who are aggressively growing their blockchain economies.” (from the joint press release).

There are already some good summaries like this CNBC article. The bill itself is a relatively easy read (10 pages or so, double spaced). There’s interesting ideas about taxes, banks, and SEC regulation in there, but I’d like to focus on the most interesting thing to me: the token definition.

A Clear Definition of a New Asset Class

Many people share the opinion that digital tokens on blockchains represent a new asset class. So far when trying to determine what the definition of this new asset class might be, the community largely relies on what it might not be — namely what tokens are unlikely to be classified as securities by applying the 1946 Howey Test. In contrast, the Token Taxonomy Act contains a clear definition of a Digital Token (which is then excluded from the Definition of a Security).

It seems to me that the definition in this bill is based around 4 criteria: How it’s created, how the ledger works, how transactions work, and what it represents.

Creation

A Digital Token is created “in response to the verification or collection of proposed transactions” -or- “pursuant to rules for the [token’s] creation and supply that cannot be altered by a single person or group of persons under common control” -or- “as an initial allocation of [tokens] that will otherwise be created in accordance with” 1 or 2 above.

Ledger

“A Digital Token has a transaction history that is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process; and after consensus is reached, cannot be materially altered by a single person or group of persons under common control.”

Transactions

“A Digital Token is capable of being traded or transferred between persons without an intermediate custodian.”

Representation

“A Digital Token is not a representation of a financial interest in a company, including an ownership or debt interest or revenue share.”