On Thursday, September 15, 2022, the Senate Agriculture Committee will hold a hearing on the bipartisan Digital Commodities Consumer Protection Act of 2022 (the Stabenow-Boozman bill). The bill seeks to answer one of the most frequent questions in crypto policy: who will oversee crypto marketplaces and what will that look like? While the bill makes important strides – appropriately giving the Commodity Futures Trading Commission (CFTC), as opposed to the Securities and Exchange Commission (SEC), exclusive jurisdiction over “digital commodity” trades – it sidesteps the hard question of what exactly a digital commodity is.

To be clear, the bill defines a digital commodity as a “fungible digital form of personal property that can be possessed and transferred person-to-person without necessary reliance on an intermediary.” There are things to like in this concise definition, particularly its focus on disintermediated peer-to-peer transfers. Nonetheless, it’s what the definition leaves out that can pose future challenges.

For one, the bill goes on to provide that digital commodities include “property commonly known as cryptocurrency or virtual currency, such as Bitcoin and Ether,” but this circular statement does little to clarify what to make of the broader universe of crypto tokens. This is notable because “digital commodity” also expressly excludes “a security” from its scope, leaving open a kind of crypto classification purgatory for continually rehashing the proverbial horse vs. mule debate over what’s a crypto security and what’s a crypto commodity.

One of the problems with crypto purgatory is that judging by a recent speech by SEC Chair Gary Gensler, it will be interminable if he has his way. Although the SEC has not proposed any formal rules for the crypto space, Gensler’s latest rejoinder to those who have “called for greater ‘guidance’ with respect to crypto tokens” (scare quotes in the original) is to argue, “Not liking the message isn’t the same thing as not receiving it” – or in other words, no and stop asking.

A deeper problem with crypto purgatory is that there are novel substantive questions presented by the development cycle for cryptocurrencies that complicate the application of securities laws but have not yet been answered. In light of this, perhaps one of the biggest wins in the Stabenow-Boozman bill is the codification of Ether as a commodity, vindicating those in the crypto community who took the message literally when in 2018 then‐​Director of the SEC’s Division of Corporate Finance, William Hinman, stated that based on “the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.” The trick now is to find a generalizable means of making such determinations about the thousands of other crypto tokens beyond Bitcoin and Ether.

The reason it’s significant when a token like Ether is classified as a commodity is that the original Ether sale in 2014 arguably resembled an initial coin offering (ICO), the practice of selling a token to finance a project, which the SEC now considers to be an unregistered securities offering. If Ether is now a commodity because it’s decentralized but perhaps was once a security because of how it launched, how should the law treat this evolution?

Jennifer Schulp and I proposed a legislative solution for this: a streamlined disclosure option for crypto token projects on the path to decentralization that provides information relevant to crypto purchasers. This pathway would allow nascent projects to raise money and distribute tokens without fear of getting slapped with an SEC enforcement action before they have a chance to achieve their decentralized end states.

Perhaps the hardest thing in crypto policy is figuring out what decentralization actually means. We proposed codifying a test for assessing whether crypto tokens are decentralized: whether a seller or developer is promising to take efforts, such as developing software or promoting its use, necessary to deliver the token and its benefits.

But decentralization is not only a critical question when classifying tokens; it also is relevant to the regulation of secondary markets, which the Stabenow-Boozman bill seeks to rationalize. In calling for mandatory registration of all “digital commodity platforms” (e.g., places for trading crypto commodities), the bill also poses potential challenges for decentralized crypto exchanges, or “DEXs.” As Matt Levine put it recently, “If a crypto exchange is just a set of self-executing smart contracts, if liquidity is provided by people depositing pairs of cryptocurrencies into automated market maker pools, then who registers the exchange…?”

Not every crypto bill needs to answer every crypto regulatory question, and moving the SEC’s hands away from crypto commodities is an important step. Nonetheless, leaving open the issue of what’s a crypto security and what’s a crypto commodity will continue to confound developers and users. And to truly grasp the nettle of crypto, sooner or later policymakers will need to reckon with what decentralization means in practice and under the law.