Is Ripple’s XRP a security or token? 

That question may not matter much in the future, if a new bill introduced by Reps. Warren Davidson, R-Ohio, and Darren Soto, D-Fla. Is passed by both houses. The bill seeks to amend the Securities Act of 1933, which determines whether a given asset is a security or not, to include the definition of a “digital token” separate from securities.

In a statement, Rep. Davidson said the intent of their bill was to provide certainty and avoid over-regulation of the cryptocurrency market, similar to Congress’s attitude towards the Internet during its early days. The details of HR 7356 are still not public. A successful passage for the bill could provide regulatory clarity to entrepreneurs and thaw the chill over initial coin offering (ICO) markets due to the SEC’s recent actions and pronouncements regarding cryptocurrency markets.

The regulatory status of tokens has been the cause of much debate and controversy. The SEC uses the Howey test – which uses the three-pronged test of investment in a common enterprise, profit expectations, and promotion by third-parties – to determine whether a given asset is a security. But the novel nature and organization of cryptocurrencies means that there is much confusion about applying the Howey Test framework to tokens. 

For example, the 2014 ICO for ethereum’s ether satisfied all three criteria of the Howey test. The original whitepaper mentioned that ether would be provided to early buyers at a discount, thereby setting expectations of profits in the future. The ethereum foundation was also responsible for promoting the ICO to interested buyers.

However, SEC commissioner William Hinman said this year that ethereum had evolved into a decentralized system, meaning no single entity profited from an increase in ether’s price. This meant that ether was not subject to stringent disclosure laws applicable for securities.    

Even as Hinman set ether in the clear, the SEC’s enforcement division has cracked down on suspect ICOs and either shut them down or fined them. The result has been a visible cooling of the ICO funding boom that characterized the run up in cryptocurrency prices during the earlier part of this year. The SEC’s actions have also had an adverse effect on cryptocurrency markets, which have been in a swoon since the beginning of this year. A positive step towards regulating cryptocurrencies could revive the markets.