Venture capital firm Andreessen Horowitz (A16Z) is calling on U.S. lawmakers to amend the draft cryptocurrency bill, warning that the proposed framework could open dangerous loopholes and undermine investor protection.
In an open letter to the U.S. Senate Banking Committee on Thursday, investment companies suggest that regulators should close loopholes in the crypto bill. This letter is the response to a discussion draft published in late July.
The draft of the issue is based on the 21st century Financial Innovation and Technology Act, which calls for industry input on ongoing cryptographic regulations. A16Z refers to the definition of a subsidized asset, and refers to tokens sold in investment contracts that do not grant the buyer the right to stock, dividends or governance.
“Auxiliary asset structures should not act as a foundation for law without major modifications,” the written reads.
Andreessen Horowitz Headquarters. sauce: Wikimedia
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A16Z pushes “digital commodity” models
The A16Z said the current approach fails to solve the core problems facing the crypto market and is incompatible with Howey Test, a long-standing legal benchmark for defining securities.
The investment company said the approach “doesn’t solve the challenges faced by crypto market participants.” Instead, the company recommends adopting the narrower “digital commodity” framework of the Clarity Act.
A16Z also argued that “Howey Test remains a key element of the US securities law,” and that it should remain in its current form. The proposed solution is to “codify modernized applications suitable for sub-assets.”
The proposed changes to Howey Test were described as “unnecessary and dangerous), as they are trying to rewrite them in a way that undermines the protections of investors.”
“These changes are not merely a problem and are incompatible with the wider architecture of the US securities law.”
Insider sales should be restricted
A16Z also said that applying security laws to primary transactions and commodity regulations for secondary transactions would create a loophole, allowing issuers to sell supplementary assets to insiders under exemptions and then resell them to the open market without falling under securities regulations.
As a solution, the investment company proposed that the project would require diversification to be achieved by eliminating the mechanism of control. Applying forwarding restrictions through these means “can close loopholes that would otherwise occur,” the letter states.
According to A16Z, this also prevents insider enrichment at the expense of general investors, ensuring that the distinction between primary and secondary markets remains meaningful.
“If control is abandoned and projects are decentralized, these restrictions should be gone, as the asset’s trust dependencies are now similar to those of the product.”
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Control-based distributed framework
The company suggests that regulators need to adopt a control-based decentralization framework. It says that this is “a good way to assess the evolution of the risk profile of subsidized assets.”
The letter explains that the approach should “focus on which parties hold unilateral authority, manipulation, economic, or governance through blockchain systems.” This should be considered when applying the Howey test, according to the investment company.
“Howie should not be abandoned. Instead, Congress should codify the underlying principles of assets under a control-based decentralization framework.”
Protects plumbers, not pipes
A16z further states that the Securities and Exchange Commission (SEC) focuses on the “effort of others” aspect of the Howie Test.
This claims to reduce transparency, exposes users to the risk of private use, stalling innovation. The letter also suggests that engaging in technology based on a code should not infringe securities laws.
“The law needs to make it clear that the core technology capabilities required to operate decentralized blockchain systems, such as the execution, mining, staking and execution of consensus algorithms, do not constitute financial activities regulated under the US Securities or Commodities Act, themselves.
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