Recent events have indicated the possibility of the Token Taxonomy Act becoming law. According to Warren Davidson, the United States Congressman serving Ohio`s 8th District, there is urgent need for regulations in the crypto sphere. He expressed his excitement on his Twitter Page about the revisions of the bipartisan bill and looked forward to its reintroduction.

Warren Davidson together with Darren Michael Soto, Florida’s
Democratic Representative proposed the bill to the U.S. House of Representatives
in late 2018. Even so, it goes back to the 30’s and is an attempt to amend the
1933 Act and the 1934 Act.

The Token Taxonomy Act aims to transform the trading and
taxation of cryptocurrencies. By so doing, it shuts out digital tokens when
defining a security. It could change the way cryptocurrencies are traded and

It is a common belief that digital tokens constitute a new
asset class. When describing the new asset class, people mainly concentrate on
what it is not likely to be. This is in respect to the Howey Test
court case of 1946 which implies that a digital token is not a security.

The Token Taxonomy
Act Broken Down

The Token Taxonomy Act revolves around 4 principles.

1. Creation

A digital token is:

(i) A unit whose creation is ‘‘in response to the verification or collection of proposed transactions”;

(ii) “pursuant to rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control”; or

(iii) “as an initial allocation of digital units that will otherwise be created in accordance with clause (i) or (ii).”

For starters, it singles out mined tokens. Additionally, this
principle implies a digital token is that whose regulations for creation and
supply cannot be changed by an individual or group of people. Additionally, there
is space for prior sales if they are in line with the stipulated guidelines.

2. Transaction History

The transaction history of a digital token

  • “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.

This clause describes a spread-out ledger in decentralized
harmony gauged by a crypto.

3. Transactions

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

This simply means that there is no need for middlemen in trades
involving digital currencies.

4. Representations

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

This principle suggests that a digital token should never be
regarded as part of a company’s stock.

How the Token
Taxonomy Act Stands to Revolutionize the Digital Market

The impact the Token Taxonomy Act will have in the digital
market cannot be overlooked. The need to regulate the industry to define
digital currencies is essential in tackling growing blockchain economies. The
bill could transform the cryptocurrency world in the following ways:

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More Freedom

If passed, this bill grants more freedom to token investors
and creators alike. This is because it provides for the distribution of new
tokens provided they are not being produced as a security. As such, the United States
Securities and Exchange Commission (SEC) would use it to define and identify
token securities, bar the trade of those tokens and direct creators to give
back untouched sums to investors.

Entry Point for the
Creation of More Cryptocurrencies

Less interference in the digital market means more room for creation
of new digital tokens. In fact, there is a possibility that the
cryptocurrencies may rise to levels that have never been witnessed before. The
existence of a robust regulatory framework would be greatly beneficial for
emerging digital currencies.

This would in turn protect the different stakeholders in the
industry. It would advance immense market solutions in addition to protecting
consumers.  The birthing of stable coins
and Initial Coin Offerings would also be better regulated.

More Profits

As it stands, taxes imposed on cryptos are calculated in the
same way as stocks and other properties. This means losses are not carried
forward into the following year and this often leads to mishandling of cryptocurrency

As a result, huge taxes levied on investors lead to the
unpredictability in the value of this asset class notwithstanding. Tax
exemptions would therefore result in higher profits.


Legally speaking, the word “security” has many definitions. The
criteria used by the Token Taxonomy Act to define how and which dealing is a
security include;

  1. It should be an investment involving assets or money
  2. The investment should be directed towards a common enterprise
  3. Profits are anticipated
  4. Profits arise from a third party’s work

Greater Certainty

Most digital currencies are in line with these guidelines.
And so, this bill strives to exclude digital tokens when defining securities.
This would protect cryptocurrencies from being excessively controlled to allow
the adoption of rising assets.

to Congressman Darren Soto, “Providing this much needed certainty frees the
SEC to perform its vital and much needed consumer protection duties of
enforcement on those who have engaged in securities` fraud by making false
claims or simply attempting to engage in regulatory arbitrage to circumvent
securities law.”

That said, this bill seeks to not only prevent taxation of
cryptos, but also offers protection against fraud.

Conclusively, without a doubt, this bipartisan bill will change the digital market from what it has been known into a new paradigm. The bill might not have all the answers but it sure is a step in the right direction.

Featured image via BigStock.