Andreessen Horowitz (a16z) is urging U.S. lawmakers to revisit and revise a draft crypto regulation bill, warning that the current proposal could open legal loopholes and weaken investor protections.
Key Takeaways:
- a16z warns the draft crypto bill creates legal loopholes around ancillary assets.
- The firm says redefining securities could weaken protections and contradict the Howey test.
- It urges lawmakers to tie token exemptions to clear decentralization milestones.
The venture capital firm raised its concerns in a formal letter sent Thursday to the Senate Banking Committee.
The letter responds to a recent discussion draft aimed at shaping the 21st Century Financial Innovation and Technology Act, also known as the CLARITY Act.
a16z Warns Draft Crypto Bill Missteps on Ancillary Assets
While the draft seeks to clarify the regulatory landscape for digital assets, a16z argues that the framework as written poses legal and structural risks, especially around the treatment of “ancillary assets.”
Ancillary assets refer to digital tokens sold alongside investment contracts, typically without providing buyers with equity, dividends, or governance rights.
a16z said using this category as the foundation for new legislation “without significant modifications” is problematic.
The firm believes this structure contradicts the Howey test, which is the longstanding legal standard for determining whether an asset qualifies as a security under U.S. law.
“Rewriting Howey,” the letter stated, “would depart from settled law and endanger investor protections.”
Instead, a16z supports the CLARITY Act’s narrower definition of “digital commodities” and recommends codifying a control-based decentralization model.
This would assess whether any party retains unilateral control, operational, financial, or governance, over a blockchain system.
According to the firm, decentralization should mark the point at which an asset transitions from a security to a commodity.
The firm also criticized the bill’s proposed distinction between primary and secondary markets.
It argued that allowing commodity regulations to govern secondary trading could enable issuers to offload tokens to insiders under exemptions, who could then resell them publicly without regulatory oversight.
a16z proposed that decentralization milestones be required before such exemptions apply, ensuring that investor protections remain intact.
a16z Urges Transfer Limits Until Full Decentralization
To close this gap, the letter recommends imposing transfer restrictions that phase out only after a project achieves genuine decentralization.
“Once control is relinquished,” the firm wrote, “those restrictions should fall away, as the asset’s trust dependencies now resemble those of a commodity.”
The letter also addressed the SEC’s past application of the Howey test, especially its emphasis on the “efforts of others” aspect.
a16z claims this approach has discouraged transparency and hindered innovation by pushing developers to distance themselves from projects to avoid legal risk.
Last month, the GENIUS Act, or the Guiding and Establishing National Innovation for US Stablecoins Act, passed the House with bipartisan backing, including votes from over 100 Democrats.
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