Venture capital giant Andreessen Horowitz (a16z) has issued a warning to the US Senate Banking Committee, urging a major rethink of proposed cryptocurrency regulations.
In an open letter released Thursday, the firm criticized the draft legislation’s “ancillary asset” framework. It argued that it creates dangerous loopholes that could erode investor protections and destabilize the crypto market.
The draft, an extension of the 21st Century Financial Innovation and Technology Act (CLARITY Act), defines ancillary assets “as tokens sold with investment contracts but without equity, dividend, or governance rights.”
A16z criticized this approach as flawed, warning it conflicts with the cornerstone Howey test, the legal standard for identifying securities.
The firm called for scrapping the ancillary asset concept entirely, labeling proposed changes to the Howey test as “unnecessary and dangerous” for undermining settled securities law.
A16z Pushing For “Digital Commodity” Framework
Instead of the current framework, a16z advocated for the CLARITY Act’s “digital commodity” model, which it claims offers clearer rules and preserves regulatory simplicity.
The firm argued that the draft’s approach fails to address core issues plaguing crypto markets, leaving issuers and investors in a murky legal landscape.
A16z proposed codifying a modernized Howey test tailored to ancillary assets, emphasizing a “control-based decentralization framework” to assess risks based on whether any party retains unilateral control over a blockchain system.
A16z Closing Insider Loopholes
A16z highlighted a critical loophole in the draft and that is the issuers could exploit exemptions to sell ancillary assets to insiders in primary transactions.
Then they can resell them on public markets without securities oversight. This, the firm warned, risks insider enrichment at the expense of public investors.
To counter this, a16z recommended mandating decentralization by eliminating mechanisms of control and transfer restrictions. This will help in constructing a clear distinction between primary and secondary markets.
Once a project achieves decentralization, these restrictions could be lifted, aligning the asset’s risk profile with that of a commodity.
Protecting Innovation, Not Just Infrastructure
The letter also took aim at the SEC’s focus on the “efforts of others” prong of the Howey test, arguing it stifles innovation, reduces transparency, and exposes investors to hidden risks.
A16z called for legislation to clarify that core blockchain functions like running consensus algorithms, mining, staking, and executing smart contracts should not be treated as regulated financial activities under US securities or commodities laws.
“Protect the plumbers, not the pipes,” the firm urged, emphasizing that technological contributions to decentralized systems should not trigger regulatory scrutiny.
A Call to Action For True Crypto Clarity
With the crypto industry at a crossroads, a16z’s letter underscores the urgency of crafting clear, robust regulations that balance innovation with investor safety.
The firm’s push for a control-based decentralization framework and a refined Howey test signals a broader industry demand for rules that foster growth while closing exploitable gaps.
As lawmakers refine the CLARITY Act, the debate over how to regulate digital assets is heating up, with major players like a16z drawing the line.