Senate Bill Redraws Securities Laws with Crypto-Friendly Separation Theory

The Senate Banking and Agriculture Committees have combined their work on the Digital Asset Market Clarity Act (the CLARITY Act), releasing an updated text of 616 pages. Most commentary has focused on the ethics and decentralized-finance provisions, but Title I will matter most in the long run.

Title I redraws the boundary of federal securities laws, adopting the crypto industry's 'separation theory'. This theory argues that a token sold as part of an investment contract is separate from that contract and therefore not itself a security. The Supreme Court decision SEC v. W.J. Howey Co. in 1946 supports this argument: a token is like an orange grove, while the fundraising scheme surrounding it may be a securities offering.

Judge P. Kevin Castel in SEC v. Telegram rejected this theory, treating the Gram purchase agreements, tokens, and their anticipated public resale as 'a single scheme' under Howey. However, Judge Analisa Torres's 2023 ruling in SEC v. Ripple was the first crypto decision to embrace the separation theory.

Title I defines a 'network token' as a digital commodity linked to a distributed ledger system and directs that it be treated as a non-security under federal securities laws. An 'ancillary asset' is a network token whose value depends on its originator's entrepreneurial or managerial efforts. New Securities Act section 4B provides that an originator's offer or sale of an ancillary asset constitutes an offer or sale of an investment contract involving that asset, while the asset itself remains a non-security.