Venture capital powerhouse Andreessen Horowitz, often referred to as a16z, has publicly requested US lawmakers to revisit a proposed digital currency regulation. The firm is concerned that the existing draft could inadvertently create vulnerabilities and weaken protections for investors.
In a public statement addressed to the Senate Banking Committee on Thursday, the investment group urged alterations to close potential regulatory gaps within the cryptocurrency legislation being developed. The firm’s communication was a direct response to the preliminary legislative text that was circulated in late July.
The document under scrutiny builds upon principles from the 21st Century Financial Innovation and Technology Act, also known as the CLARITY Act, and seeks expert opinions to shape future crypto regulations. A16z specifically highlighted the classification of “ancillary assets,” which are tokens sold with investment contracts that do not grant purchasers rights to equity, dividends, or corporate governance.
The firm stated plainly, “The concept of ancillary assets should not form the basis of law without significant revisions.”
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A16z Advocates for a “Digital Commodity” Approach
According to A16z, the current regulatory direction fails to adequately address fundamental problems in the cryptocurrency sector and is incompatible with the Howey Test, which is a well-established legal benchmark for determining what qualifies as a security.
The investment firm said the present course “will not solve the existing problems facing those involved in the crypto market.” Instead, they suggest adopting the more focused “digital commodity” model outlined in the CLARITY Act, which they believe provides greater clarity and regulatory simplicity.
A16z emphasized that “the Howey test is an important cornerstone of US securities law” and should remain in its current form. They suggest codifying a modern version tailored to ancillary assets.
The firm described the proposed alterations to the Howey test as “unnecessary, and potentially harmful, because it attempts to reinterpret the Howey Test in a way that deviates from established legal precedent and undermines safeguards for investors.”
“These changes are not simply problematic; they clash with the basic structure of United States securities law.”
Limitations on Insider Sales Recommended
A16z also argued that applying securities regulations to initial sales while applying commodity regulations to subsequent sales creates a loophole. This loophole would allow issuers to initially sell ancillary assets to insiders using exemptions, and then resell the assets publicly without being subject to securities regulations.
To mitigate this, the firm suggested establishing decentralization standards that eliminate controlling mechanisms. Employing transfer restrictions through these methods “could close loopholes that may otherwise develop,” according to the letter.
A16z argues this would protect public investors from insider enrichment and preserve the importance of distinguishing between initial and subsequent markets:
“Once control is surrendered and the project reaches decentralization, those restrictions should no longer be in effect, since the asset’s dependence on trust then mirrors that of a commodity.”
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Advocating for a Control-Based Decentralization Approach
The company urged regulators to implement a control-based decentralization framework, describing it as “the optimal method for assessing the evolution of an ancillary asset’s risk profile.”
The communication emphasizes that this strategy “should focus on whether any single party retains unilateral authority—whether operational, economic, or in governance—over the blockchain system.” A16z argues this is a crucial factor when utilizing the Howey Test:
“Abandoning Howey is not the answer. Instead, Congress should codify the principles underlying Howey for assets under a control-based decentralization framework.”
Prioritize the Architects, Not Just the Infrastructure
A16z further clarified that the SEC’s historical emphasis on the “efforts of others” part of the Howey test “has created significant perverse incentives.”
The firm asserts this leads to diminished transparency, increased exposure to hidden risks, and hindered innovation. The letter also stresses that involvement with fundamental crypto technology shouldn’t automatically trigger securities law.
The letter states that “Legislation should make clear that essential technological functions that are necessary for the operation of decentralized blockchain systems—such as operating consensus algorithms, mining, staking, and running smart contracts—do not, on their own, constitute regulated financial activities under U.S. securities or commodities laws.”
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