Venture capital firm Andreessen Horowitz (a16z) is urging U.S. lawmakers to amend a cryptocurrency regulatory bill draft, warning that the proposed framework could open dangerous loopholes and weaken investor protections.
In an open letter to the U.S. Senate Banking Committee on Thursday, the investment firm urged regulators to close loopholes in the cryptocurrency legislation draft. This letter is a response to the discussion draft released at the end of July.
The discussion draft is based on the 21st Century Financial Innovation and Technology Act (CLARITY Act) and seeks industry input on ongoing cryptocurrency regulation. a16z pointed out the definition of ancillary assets, referring to tokens sold through investment contracts that do not grant buyers equity, dividends, or governance rights.
"The ancillary asset structure should not serve as the basis for legislation without significant modifications," the letter stated.
a16z indicated that the current approach fails to address the core issues facing the crypto market and is incompatible with the long-standing legal benchmark for defining securities, the Howey test.
The investment firm stated that this approach "fails to address the challenges faced by participants in the crypto market." Instead, the company suggested adopting a narrower "digital commodity" framework from the CLARITY Act, claiming it would provide greater certainty while maintaining regulatory simplicity.
a16z also stated, "The Howey test remains a key component of U.S. securities law" and should be maintained in its current form. The proposed solution is to "develop regulations for ancillary assets that are suitable for modern applications."
It described the proposed changes to the Howey test as "unnecessary and dangerous, as it attempts to rewrite Howey in a way that deviates from established law and weakens investor protection."
a16z further stated that applying securities law to primary trading and commodity regulations to secondary trading would create loopholes, allowing issuers to sell ancillary assets to insiders under exemptions and then resell them on public markets without being subject to securities regulations.
The company suggested achieving project decentralization by eliminating control mechanisms. Imposing transfer restrictions "can close otherwise emerging loopholes," the letter stated.
According to a16z, this would also prevent insiders from profiting at the expense of public investors and ensure that the distinction between primary and secondary markets remains meaningful:
The company urged regulators to adopt a control-based decentralization framework, calling it "the appropriate way to assess the evolving risk profile of ancillary assets."
The letter stated that this approach "should focus on whether any party retains unilateral power over the blockchain system—operational, economic, or governance." According to a16z, this should be considered when applying the Howey test:
a16z further stated that the U.S. Securities and Exchange Commission (SEC) has previously focused on the "efforts of others" aspect of the Howey test, which "has created significant counterproductive incentives."
It stated that this has led to reduced transparency, exposing users to undisclosed risks, and hindering innovation. The letter also stated that the foundational participation in crypto technology should not infringe upon securities law.
"Legislation should clarify that the core technological functions necessary for the operation of decentralized blockchain systems—such as running consensus algorithms, mining, staking, and executing smart contracts—do not themselves constitute financial activities regulated by U.S. securities or commodity laws," the letter stated.
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Original article: “Andreessen Horowitz warns of loopholes in U.S. cryptocurrency rules draft”
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