Andreessen Horowitz’s Call for Regulatory Revisions
Prominent venture capital firm Andreessen Horowitz, also known as a16z, is urging US lawmakers to revise a proposed cryptocurrency regulation bill that they believe could lead to significant loopholes and jeopardize investor protections. In an open letter sent to the US Senate Banking Committee on Thursday, the firm expressed its concerns regarding a draft released in July that is connected to the 21st Century Financial Innovation and Technology Act, commonly referred to as the CLARITY Act.
Concerns Over Ancillary Assets Definition
The draft legislation seeks insight from the industry on how to shape future crypto regulations. Andreessen Horowitz specifically criticized the way “ancillary assets” are defined within the proposal—these assets are generally tokens sold along with investment contracts that lack equity, dividend, or governance rights for purchasers. The firm argued that this framework should not be used as a legislative foundation without significant changes.
Inadequate Regulatory Approach
Moreover, a16z posits that the current regulatory approach does not adequately address the primary challenges within the cryptocurrency markets. They assert that the draft is inconsistent with the Howey test, a longstanding legal standard for defining securities, and would not effectively protect investors. Instead, they advocate for the adoption of a more precise “digital commodity” model that the CLARITY Act previously outlined, as it promises a balance between regulatory clarity and simplicity.
Preserving the Howey Test
Additionally, Andreessen Horowitz maintains that the Howey test should remain intact as a vital part of US securities law, recommending a modernized interpretation for ancillary assets instead of attempting to alter the test itself, which the firm describes as both unnecessary and potentially harmful to investor protections.
Addressing Insider Trading Concerns
In the letter, a16z also pointed to significant concerns regarding insider trading. They argue that the current regulatory structure, which applies securities law to primary transactions while imposing commodity regulations on secondary transactions, allows issuers to exploit exemptions that ultimately benefit insiders at the expense of public investors. To counteract this, the firm suggests that projects should be mandated to achieve decentralization by removing exerted control, thus closing loopholes that could emerge under the current framework. Once a project is decentralized, these restrictions should no longer apply, aligning the asset’s risk profile more closely with that of a commodity.
Control-Based Decentralization Framework
Andreessen Horowitz advocates for a “control-based decentralization framework” to assess the risk profile of ancillary assets effectively. They believe that regulators should focus on any entity’s unilateral control over the blockchain technology when interpreting the Howey test.
Cautions Against SEC’s Emphasis
Finally, a16z cautioned against the SEC’s emphasis on the “efforts of others” component of the Howey test, arguing that it creates a host of unwanted consequences such as diminished transparency, undisclosed risks for users, and impeded innovation. They emphasize that the legislation should clarify that essential technological functions supporting decentralized blockchain systems—including consensus algorithm operation, mining, staking, and smart contract execution—should not be classified as regulated financial activities under US securities or commodities law.
