How to Talk to Your Legislator About the Crypto Safe Harbor

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Yesterday, Representative Patrick McHenry (R-NC), the highest ranking member of the House Financial Services Committee, introduced a bill that would provide a safe haven for crypto startups looking to raise capital through token sales. The bill is based on safe harbor rules set out by US Securities and Exchange Commissioner Hester Pierce, a longtime crypto ally.

The proposal is a nuanced attempt to square the circle at the heart of funding crypto networks. The dilemma looks like this: If a new network’s token is classified as a security from the start, only institutional players and venture capitalists will be able to buy it. This makes it less likely that the network will have a truly decentralized user base or development community. On the flip side, you can’t give crypto carte blanche over securities regulation or you’ll end up with widespread fraud, as we saw during the initial coin offering (ICO) boom. in 2017.

David Z. Morris is the chief ideas columnist for CoinDesks.

The Pierce / McHenry proposal would give new crypto startups three years to create and sell tokens without classifying them as securities. The goal would be to achieve a sufficient level of decentralization during this window, allowing them to earn the classification as a commodity of conventional wisdom around bitcoin and ethereum rather than security. Overall, this is a proposition that seems very much in line with the growth of crypto networks.

But the proposal also includes many types of guarantees that the SEC should want. In exchange for a safe harbor, it requires projects to provide certain information, including naming core team members. It also defines at least two key technical hurdles: Projects must have open source code and be visible with a block explorer. These provisions would in themselves constitute huge anti-fraud measures, allowing projects to be fully controlled by the community over ideas, execution and operations. Pure and straightforward frauds like BitConnect or OneCoin are unlikely to get past the starting point.

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After three years in this safe harbor, projects should assess their own progress towards decentralization and file a report with the SEC. If they don’t meet certain standards, such as development outside of the core team, then they should register as security within three months. It would effectively be an admission that the growth of the system still depended mainly on the work of the core development team, meaning that it would fail the Howey test that defines a security.

Read more: Pandora Papers Show Why People Love Crypto: You Can’t Trust The Powerful David Z. Morris

Approvals for Bill McHenry came from industry groups including the Digital Chamber of Commerce and the Coin Center. His political chances are unclear, at least as long as Democrats still control both houses of Congress. But its introduction is an opportunity for politically motivated individuals and organizations to engage with their crypto lawmakers. If you would like to call or email, here are the contact details for the Senate and House offices.

You probably won’t get a chance to speak to a human (much less a senator), but bureaus track the volume of inbound comments they receive on invoices. Expressing support for the McHenry / Pierce crypto safe harbor proposal is one way to (perhaps) help avoid what appears to be on the verge of becoming a much more aggressive regulatory regime under SEC Chairman Gary Gensler. .

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