Ways and Means Committee Republicans recently introduced the American Families and Jobs Act, an economic tax package that addresses significant ongoing tax increases on domestic investment built into the 2017 Tax Cuts and Jobs Act. Most of the Republicans’ major proposed changes in the American Families and Jobs Act expire after 2025, worsening current tax uncertainty and obscuring the necessary reforms’ fiscal cost.

Other than permanence, the American Families and Jobs Act could be significantly improved by adding Universal Savings Accounts for family savings flexibility and neutral cost recovery for currently excluded building investments. The proposed legislation includes a series of other reforms, many that are good and a few that are misguided.

The package is comprised of three bills: the Tax Cuts for Working Families Act (H.R. 3936), the Small Business Jobs Act (H.R. 3937), and the Build It in America Act (H.R. 3938). Here is a brief summary of the most important provisions.

Expensing. The central pro-growth component of the package is the extension of full business expensing for R&D, equipment, and machinery. As I recently explained in a Cato brief, the normal tax rules require businesses to deduct their investment spending over time (between 3 and 39 years). Especially during times of high inflation, such as the current economic climate, these rules increase the after-tax cost of new investments because the value of the associated tax deduction decreases over time.

The 2017 Tax Cuts and Jobs Act temporarily fixed this problem by allowing businesses to fully deduct the cost of some new investments in the year they are made, called full expensing or 100 percent bonus depreciation. Beginning last year, companies started amortizing research expenses over five years, and beginning this year, equipment and other short-lived investments lose 20 percent of their immediate expensing deduction each year through 2026.

The American Families and Jobs Act would allow full expensing for short-lived investments and R&D spending through 2025. It would also increase the expensing limit for small businesses to $2.5 million. By not extending full expensing to longer-lived assets, such as structures, the legislation does not apply to a significant portion of annual business investment. The legislation could be improved by making the expensing changes permanent and including a neutral cost-recovery system for structures, which provides a similar economic benefit as expensing by enabling businesses to index their write-offs for inflation and time, such as in the CREATE JOBS Act.

1099 Fixes. The previously obscure 1099‑K form reports business transactions with a credit or debit card or online settlement platforms such as PayPal or Venmo. The American Rescue Plan Act of 2021 lowered the 1099‑K de minimis threshold from more than 200 transactions and $20,000 in total payments to a single $600 threshold. In 2022, the IRS delayed the implantation of this rule as it threatened to sweep as many as 20 million taxpayers into the costly and unnecessary new reporting system. The proposed legislation would repeal the 2021 change.

The legislation also increases the general reporting threshold for other Form 1099 transactions from $600 to $5,000, indexed for future inflation. The current threshold is not indexed for inflation and has not been raised since 1954, when $600 was worth more than $6,500 in today’s dollars. The higher thresholds will ease compliance burdens and lower administrative costs.

Interest expense limitation. Beginning in 2022, the business interest deduction limit switches from 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) to a more restrictive definition of earnings before interest and taxes (EBIT). The tighter write-off definition increases the cost of debt-financed investments. The Republican legislation would maintain the pre-2022 EBITDA base through 2025. Keeping taxes on investment from rising is an important goal, and using EBITDA follows international norms. However, policymakers should remember that the current treatment of interest in the tax code is neither uniform nor ideal and deserves a more holistic reform in the future.

Expanded capital gains exclusion. Under current law (IRC Section 1202), individuals are allowed up to a 100 percent exclusion of $10 million of capital gains on qualified small business C corporation stock. The legislation would expand the exclusion by extending the preferential treatment to S corporations and phasing in the exclusion’s benefit during the 5‑year mandatory holding period.

Among other reasons, keeping capital gains taxes low is critical to spur “investment in startups and growth companies, particularly technology companies,” as explained by Chris Edwards. The expansion of Section 1202 is a step in the right direction of a lower capital gains tax rate. However, Congress should ideally treat all types of investment equally, at one low or zero rate, instead of carving out specific types of investments for preferential treatment.

Repeals select energy credits. The Inflation Reduction Act (IRA) included as much as $1.2 trillion in distorting energy market subsidies, intended to put Washington bureaucrats at the center of critical energy investment decisions. The Republican’s proposal would repeal just 5 of more than 20 tax subsidies in the IRA. The bill repeals two energy credits that do not take effect until 2025 or later and three electric vehicle (EV) credits, leaving a more limited EV credit similar to pre-IRA in place.

All of the special-interest IRA energy credits should be repealed. If left in the tax code, each new IRA credit will lead to the misallocation of investment, cronyism, and other costs that are almost always the result of targeted industrial subsidies.

Temporary increase to standard deduction. The current-law standard deduction for families is about $28,000 ($14,000, single) through 2025, when it gets cut in half as the 2017 tax cuts expire. The proposal would temporarily increase the standard deduction by $4,000 for married filers ($2,000, single) below $400,000 in earnings ($200,000 single) in 2024 and 2025. Congress should focus on making the current-law standard deduction permanent instead of this $4,000 bonus that will increase the cost and complexity of the 2025 fiscal cliff.

Moving more taxpayers off the complicated itemized tax system and to the standard deduction is a worthy goal. However, it should be done by limiting the value of specific deductions, such as those for state and local taxes or mortgage interest, instead of expanding the standard deduction. Alex Brill, Kyle Pomerleau, and Grant M. Seiter estimate that the temporarily larger deduction would lead to about 4.1 million more taxpayers relying on the standard deduction. The larger standard deduction would also mean more Americans are entirely exempt from paying any income tax and is not well-targeted at other goals, such as inflation remediation.

Rural Opportunity Zones. The 2017 Tax Cuts and Jobs Act created Opportunity Zones that offer lower tax rates on specific investments in designated low-income Census Tracts. The proposed legislation would create a new Opportunity Zone designation targeted at poor, rural Census Tracts.

As Joel Griffith and I detailed in 2019, 40 years of academic and government studies “consistently show place-based development programs fail to increase employment, raise wages, or advance general economic opportunity for targeted residents.” Despite limited data, the evidence from Opportunity Zones has largely confirmed that the targeted preferences primarily subsidized already-in-the-works projects in wealthy areas. Adding new Opportunity Zones would be a mistake. Instead, Congress should lower the capital gains tax rate for everyone, to let private individuals instead of Congress determine the most productive locations for new investment.

Land tax. The legislation would impose a 60 percent excise tax on the purchase of farmland by citizens of “countries of concern,” such as China, Russia, and Iran. Scott Lincicome and Ilana Blumsack explain that “there’s little current indication that foreign farmland purchases – even by Chinese entities – justify the type of broad-based government restrictions that some in Congress are contemplating.” They go on to show that combined, all foreigners own just 3.1 percent of private farmland in the United States, and China is not even in the top 10 countries that hold the most U.S. farmland. Narrowly tailored rules restricting foreign land purchases near military assets may be justified, but punitive taxes or other bans on land purchases from entire countries are misguided.

The legislation makes other changes, such as repealing the superfund tax and addressing foreign tax credit regulations.

Room For Improvement

The most critical pieces of the pro-growth economic tax package—full expensing for R&D, equipment, and machinery—address costly tax increases already making domestic investment more expensive. The proposal could be significantly improved by making these reforms permanent and adding neutral cost recovery for investments in structures.

The legislation would also benefit from adding a Universal Savings Account, which would operate like retirement accounts but without restrictions on how taxpayers spend the funds. Additionally, several of the provisions are targeted capital gains tax cuts—Opportunity Zones and Section 1202—it would be best if the legislation simply cut the capital gains rate for all investments.

The Joint Committee on Taxation estimates the bills would lower revenue by about $21 billion over ten years but, if made permanent, would be significantly more costly. Repealing all the IRA tax credits and curtailing itemized deductions instead of boosting the standard deduction would more than offset the lost revenue from critical pro-growth tax reforms.

As you probably have heard or otherwise know by now, the 37-count indictment against former President Trump has been released (WARNING: large file). I’ve highlighted a number of sections in yellow that I think are particularly telling.

For the benefit of those who are not fluent in Intelligence Community (IC) speak, I offer the following translations regarding certain key acronyms contained in the indictment:

HCS = Human intelligence Control System. Think confidential, foreign national sources.

TK = Talent-Keyhole. That’s satellite imagery-derived information.

And I doubt I need to explain that FISA stands for the Foreign Intelligence Surveillance Act, but this info is clearly derived from the FISA Section 702 program that’s up for renewal/​expiration on New Years Eve this year.

What nobody on the leftist cable ecosphere is talking about right now is the ongoing Biden Documentgate investigation. And as I noted almost six months ago:

In contrast, President Joe Biden will not be indicted, much less prosecuted, because of a 1973 Department of Justice Office of Legal Counsel opinion that categorically asserts, “The indictment or criminal prosecution of a sitting President would unconstitutionally undermine the capacity of the executive branch to perform its constitutionally assigned functions.”

It may well be that Special Counsel Robert Hur will determine that President Biden should not be prosecuted for having classified documents in his possession after leaving government service. I personally don’t understand how that conclusion could be reached, but I also don’t have access to Hur’s investigative findings to date, so I am withholding judgment for now. However, unless Attorney General Merrick Garland rescinds that 50-year-old internal Justice Department opinion—and he should—it will be difficult for many people not to conclude that there is, in fact, no possibility of equal justice under the law when a former president can be prosecuted and a sitting president cannot be for committing exactly the same offense.

During the pandemic, Senator Mark Warner (D‑VA) released a video showcasing his tuna melt recipe—complete with a surprising amount of mayonnaise and heated in a microwave (no judgement). The “unhinged” recipe video went viral and three years later, Washingtonian sat down with Senator Warner to have him taste-test seven tuna melt sandwiches from DC and Virginia restaurants.

Senator Warner’s tuna-melt obsession reminded me of a tariff reclassification case I read about last year. Starkist Co. is well-known for its single-serve pouches of tuna and argued to the Federal Circuit that its tuna-in-mayo imports should qualify for a 10 percent tariff over the 35 percent tariff that Customs and Borer Protection assessed on the imports. The lower tariff rate applied to “minced tuna products,” and the higher tariff to unminced tuna packed in oil. However, after scrutinizing the “tuna-chopping process,” a three-judge panel decided that Starkist’s tuna products were too chunky to be considered minced. Starkist also argued that the tuna could not be considered as “packed in oil,” and should at least qualify for the 6 to 12.5 percent tariff applied to tuna imports not packed in oil. The tuna products contain oil but Starkist insisted that to be considered “packed in oil,” the tuna needed to be placed in oil while it is packed (seems logical) but the judges disagreed, stating that the “statutory authority explicitly states that for the term ‘in oil’ to apply, it matters not whether the oil was added during preparation or in the packing process.” In the end, the judges decided that Starkist’s tuna products neither qualified as “minced” nor “not packed in oil” and the 35 percent tariff charged on imports of their products stands.

Perhaps you’re wondering why this case matters. Well, it points to a very interesting characteristic of the U.S. tariff schedule, which is that imports are disaggregated so extensively as to differentiate products as narrowly as “chunky” versus “minced,” “packed in oil,” versus “not packed in oil,” and applying different tariff rates to them. The origin of the U.S. tariff schedule’s detailed classifications is explored in this excellent paper.

In other news, the Department of Commerce also recently initiated a trade remedies investigation into tin mill products (used to make cans) from Canada, China, Germany, South Korea, the Netherlands, Taiwan, Turkey, and the UK. The proposed duties range from 13.8% to 296.04% and would apply to more than $1 billion worth of imported tin mill products. A new study estimates that these duties would increase prices of canned goods by as much as 30 percent!

So it’s a double whammy for bad trade policy on that all-important tuna for Senator Warner’s favorite sandwich.

Less than a year ago, I wrote of the almost certain regret that awaited the prosperous, urban, multiple-degree-holding types who voted for Gustavo Petro, Colombia’s Chavista president. They thought they had supported a Nordic-style social democrat—failing to notice that they had helped to elect a tropical socialist who, given his past as a guerrilla group member and Hugo Chávez supporter, was also a potential autocrat. Caveat emptor (or rather suffragator) indeed. But I never thought that voter’s remorse would set in so quickly. Or so extremely.

According to poll data from June 1, 2023, only 26 percent of Colombian citizens approved of Petro’s performance as president. And this was before the scandal that shook the country’s political scene last Sunday evening, when Semana magazine released a series of WhatsApp audio files sent by Armando Benedetti, Petro’s former ambassador in Caracas, to Laura Sarabia, the president’s former chief of staff.

Among the least bombastic revelations is Benedetti’s claim that Alfonso Prada, Petro’s former interior minister, “stole the whole ministry with his wife.” This implies massive levels of corruption around Petro, who came to power with an anti-corruption agenda (quite cynically given his disreputable political alliances). Prada proceeded to sue Benedetti for libel.

Petro’s dwindling number of supporters may dismiss this as a politician’s petty slander against a rival in the cabinet. Far more concerning for them—and for Petro—is Benedetti’s matter-of-fact assertion to Sarabia that he himself obtained COP $15 billion (around USD $3.58 million at today’s exchange rate) for Petro’s 2022 presidential campaign, during which he served as the former candidate’s right-hand-man and main political handler. Petro’s campaign did not officially report any donation nearly as large. Its declared funds consisted mostly a series of bank loans, which were meant to be paid with the “reimbursement” sum that the Colombian state guarantees to candidates for each vote received in an election.

In many countries, an insider’s admission of how millions of undeclared dollars flowed into the president’s campaign coffers would bring down the government. Alas, Colombia is not one of them. This is not due to a lack of unashamedly corrupt presidents; as I wrote recently in The Wall Street Journal, the opposite has been the case. Rather, since the 1950’s, the Colombian elite’s idiosyncratic approach to presidential corruption has followed the maxim, attributed to journalist Hernando Santos (1922–1999), that the trouble with overthrowing a president is that he may fall upon those doing the toppling.

Already in Petro’s case, the three-member House of Representatives commission created to investigate Benedetti’s statements includes two members of the president’s own party. The enquiry will be a charade, which is a pity since the source of the undeclared campaign money is as important as the sum itself. In an interview, Benedetti told Semana that the money “did not come from entrepreneurs,” meaning the legal business community. Suspicion has fallen on the Marxist guerrilla groups and other drug trafficking organizations, but also on the Venezuelan regime of Nicolás Maduro. Anonymous, the hacker group, claims that Maduro financed “part of the campaign of the current president of Colombia,” but has not published evidence hitherto.

What is certain is that, in regional terms, the Maduro regime has been the principal beneficiary of Petro’s election. To begin with, Colombia recognized Maduro’s presidency after a three-and-a-half-year hiatus, and Petro himself has met Maduro four times since his inauguration. His government, which opposes any future hydrocarbon exploration in Colombia despite dwindling reserves, has promoted the idea of importing Venezuelan natural gas.

While Petro wages a political war against Colombia’s key petroleum industry—crude oil has been the country’s main legal export for decades—he lobbied President Joe Biden to end American sanctions against the Maduro regime. This would imply renewed Venezuelan oil exports to the U.S. market (even if socialism devastated Venezuela’s oil industry well beyond immediate or even medium term repair). Petro’s “shoot yourself in the foot / prosper-thy-neighbor” policy is devoid of any rationality. Unless, of course, Colombia’s increasingly authoritarian president is somehow subject to the Venezuelan tyrant.

Petro’s eco-fanatical crusade against the hydrocarbon industry is but one example of how his government is bent on destroying the few areas of the Colombian economy that are functional. Other examples include his plans to put the state in charge of centralized funding for the healthcare and pension systems, both of which are efficient—although certainly not perfect—thanks to private sector involvement and some degree of consumer choice. Where things are already problematic, Petro’s policies would make them worse. For instance, he wants to make a rigid, overregulated labor market even less flexible and more hostile to businesses.

Then there is the matter of rising insecurity, an old problem that, until recently, appeared mostly solved, only to resurface dangerously in the last year. Under Petro, illegal armed groups have expanded their power as they launch constant, deadly attacks against the armed forces and police. It all brings to mind the dark era of the late 1990’s, when Colombia was on the verge of becoming a failed state as it came under siege from the FARC guerrillas, which are still up in arms despite the much-touted “peace” agreement of 2016.

Usually, a crisis in government breeds economic instability. Under Colombia’s current government, however, the opposite has been the case. Since the Benedetti scandal broke, the peso rallied to reach its highest value against the dollar since mid-2022, when Petro was about to win the presidential election. In October, two months after he took office, the peso reached an all-time low against the dollar. Amid the current political turmoil, forward-looking markets are anticipating the failure of Petro’s legislative initiatives in health care, pensions, and labor law. Which is to say, there is speculation that Colombia’s institutional framework has already survived Petro’s statist onslaught. The weaker his position, the thinking goes, the less likely it is that non-leftist parties will lend him their support, which he needs to obtain congressional majorities.

I fear, however, that markets may be getting ahead of themselves. The Colombian congress is minimally ideological and highly transactional. There is still a good chance that, issue by issue, Petro’s government can negotiate just enough votes to have his “reforms” approved, in which case only the courts will stand in the way of his agenda.

Not that Petro is respectful of any check or balance. This week, he propounded the theory that, since he was elected, his government represents “the will of the people,” meaning that any opposition to his political project—including from the news media—is part of an illegitimate, “soft coup.” The onslaught, in other words, is far from over.

In my view, the worst part about Petro’s election victory is that, at this time last year, Colombia was in need of radical reforms. Above all, a chronically sluggish economy required budget discipline, public spending cuts, drastic debt reduction, a strong currency (ideally through dollarization), far lower taxes, labor market deregulation, subsoil privatization, school choice, and an end to non-tariff barriers. By electing Petro, however, voters decided to do precisely the opposite on all fronts. As warned, most already regret it.

Pharmaceutical giant Merck is suing Medicare, claiming new drug-pricing reforms that Congress enacted in last year’s Inflation Reduction Act coerce the company into selling its wares to the program at below-market prices. In the Wall Street Journal, attorney Daniel Troy opines that the new rules violate the First and Fifth Amendments. Big, if true.

What’s really happening here is that Merck is making tons of money off the taxpayers and wants to keep the gravy train rolling. So the company is offering whatever bad arguments it can to prevent any reductions in its Medicare subsidies.

First, a few preliminaries.

• The price Medicare should pay for all medical goods and services is $0.00. Anything that moves the actual price in that direction is a good thing. Some argue that is a recipe for failing to hit the market price. But that gets it exactly backward. Pushing the Medicare price toward $0.00 is the only way to get market prices.
• Medicare’s administrative prices are government price-setting. But they are not coercive price controls. Providers are always free to walk away.
• Every single time providers—and especially pharmaceutical companies—complain about Medicare “price controls,” it is meritless rent-seeking. Because the amount they should be getting from Medicare is $0.00.

Merck argues, to the contrary, that it is not free to walk away. It claims Congress is forcing the company to sell to Medicare at a price to which the company does not consent. If Medicare is truly coercing Merck, that’s bad, mkay? But it isn’t.

Here’s how the IRA’s new process for setting Medicare drug prices works.

1. If Medicare selects a Merck drug for price negotiation, Merck has until October 1 to enter into an “agreement” to negotiate a “maximum fair price.” Medicare’s opening bid must be at least 25 percent less than the current price.
2. If Merck does not enter into an “agreement” by October 1, “a noncompliance period would begin” that could result in “excise tax liability” for Merck.
3. If Merck enters into an “agreement,” it must sell the drug to Medicare at whatever price Medicare negotiates/​dictates or pay an “excise tax.”
4. Merck may terminate the “agreement” for any reason, but the termination does not take effect until 11–23 months after Merck announces it. In the meantime, Merck must continue to sell the drug to Medicare at the price Medicare negotiated/​dictated.

Is this actual coercion? Is it a takings in violation of the Fifth Amendment, as Merck alleges? No. Merck is rent-seeking—and hoping its use of the right shibboleths will trick conservative and libertarian legal scholars into rallying to the company’s cause.

First, Both Merck and the government are wrong to describe those “excise taxes” as taxes. Merck’s own lawyers admit, “the excise tax is suspended if the manufacturer has no relationship with Medicare or Medicaid.” Taxes are compulsory; these “taxes” are optional. Ergo, it’s not a tax. The correct way to think of those payments is that Merck would be rebating to the government a portion of the subsidies it receives from taxpayers through Medicare and Medicaid. In essence, those rebates are an across-the-board reduction in the prices Medicare and Medicaid pay for Merck’s products. No one is taxing Merck, just reducing their government subsidies.

Since those “excise taxes” are not taxes, the government is not compelling Merck to enter an “agreement.” Merck is free to decline. If the resulting rebates Merck must pay mean its government “book of business” is unprofitable, it can walk away from federal health programs.

Not even the 23-month period that Merck would have to continue selling the drug to Medicare at the Merck-unfriendly price is coercive. Merck has received plenty of notice of that condition. Merck was aware of that provision as Congress debated the law in 2021. And when Congress passed it. And when President Biden signed it in August 2022. And when Medicare announced in March 2023 how it would be implementing these provisions. Merck has had and will continue to have plenty of opportunities to avoid those conditions. It could have avoided them at any time from when Congress began debating them in 2021 until now. It could avoid them today. It could avoid them by refusing to enter into an “agreement.” At any of these points, Merck could avoid these conditions of Medicare participation without coercion.

What about the argument that threatening Merck with exclusion from government programs is effectively coercion because Medicare and Medicaid represent a yuge part of Merck’s business? We can firmly reject this argument, too.

Is it coercion when people don’t want to buy what you’re selling at the price you’re selling it? Were all those employers who didn’t hire you coercing you? Do patients coerce hospitals when they switch to lower-price competitors? Then neither is this. Losing business hurts. But it’s not coercion.

The fact that people would even think to equate Merck losing government business to coercion shows just how much government dominates health care in the United States. The fact that some people—including many limited-government conservatives—would rather let the government overpay than threaten Merck’s profit margins is an example of how all that government domination introduces moral hazard into these decisions.

Since no part of this process is coercive, Merck’s other claims of coercion (compelled speech, etc.) are also inaccurate.

In case we needed more evidence that Merck is just rent-seeking—that is, attempting to gouge taxpayers—the company describes the prices it currently receives from Medicare as reflecting “fair market value” and Medicare’s current drug-pricing rules as “a free-market approach based on market-driven prices.” Troy describes what Medicare pays as a “market price.”

These are major tells. There are no market prices in the U.S. health sector. What Sherry Glied says of health care prices in general is especially true of Medicare prices: “There is no reason to believe that current prices provide incentives that reflect either underlying costs or consumer preferences.” A good rule of thumb is that if an industry claims the price it receives from government reflects fair market value, that price is too high.

It is conceivable, though inadvisable, that federal courts might disagree with me. They may decide to impose notice requirements more stringent than common sense requires. They may choose to define what Congress is doing in this case as coercive. If so, those decisions would mark breathtaking opportunities for special interests to follow in Merck’s footsteps by taking advantage of taxpayers.

While the Securities and Exchange Commission (SEC) leans into regulating crypto by enforcement, lawmakers in the House are looking to lay a foundation for rationalizing U.S. crypto policy—releasing a Digital Asset Market Structure Discussion Draft last Friday and holding a pair of hearings this past Tuesday and next.

The Discussion Draft, while in early days, gets the big question right: it would determine whether crypto tokens are securities or commodities largely based on whether the networks over which they operate are decentralized. In addition, the Discussion Draft would help provide regulatory clarity to crypto marketplaces through long-sought pathways for lawfully registering certain crypto exchanges. While the draft would benefit from some modifications—including to the process for certifying network decentralization and the treatment of decentralized marketplaces—this legislative effort would bring much-needed clarity to U.S. crypto policy by tackling its thorny questions.

In a microcosm of the SEC’s years long effort to use the inexact fit between legacy securities laws and modern crypto markets to declare most U.S. crypto activity unlawful, the SEC on Tuesday filed a complaint alleging that U.S.-based crypto exchange Coinbase operates an unregistered securities exchange. Congressman French Hill (R‑AR) dryly dubbed it “an interesting coincidence” that the complaint was filed on the same day the House Agriculture Committee held a hearing on the Discussion Draft. Coinbase maintains the tokens it lists are not securities and that it would be happy to register with the SEC if only the Commission would let it.

The poor fit between existing rules and reality stems from the challenge of squaring securities laws designed for centralized firms and financial intermediaries with a crypto ecosystem that includes tokens generated by decentralized networks and traded via disintermediated protocols. Compounding this challenge is the fact that centralized crypto projects can decentralize over time.

The Discussion Draft, to its credit, grasps these nettles. Understanding how is a matter of understanding the security versus commodity debate. A classic security is a share of stock—a partial ownership stake in a company and claim on assets and profits. A stock’s value typically depends on how well a company and its managers perform, so securities regulation seeks to make managers share information relevant to that performance. A classic commodity, by contrast, is a piece of produce (like, say, an orange) that’s standardized and interchangeable. Its value typically depends on supply and demand.

Those arguing crypto tokens are securities analogize them to stocks: they can be sold to raise funds to build out projects and also can be viewed as proxies for those projects’ value.

Those arguing crypto tokens are commodities analogize them to produce. In a famous Supreme Court case on the nature of securities—which is tediously but unavoidably recounted in any crypto regulation discussion—the Court assessed whether an orange grove seller’s scheme to contract with land purchasers to manage orange sales and give them a cut constituted a securities arrangement. It was a securities scheme, the Court reasoned, because the seller’s efforts to manage the operation were essential. Those who argue crypto tokens are commodities point out that while certain token sales may resemble the contract in the orange grove case, the tokens themselves are best analogized to the oranges, which remained commodities notwithstanding the securities scheme.

The Discussion Draft enters this fray by identifying that crypto tokens are neither inherently like stocks nor oranges, but rather resemble one or the other depending on whether there are managers—like the executives at a company or citrus enterprise—controlling the token network.

The Discussion Draft does this through a legal test for whether a crypto project’s network is decentralized. At a high level, it defines a decentralized network as one where no person could unilaterally control, materially change, or restrict general users’ use of the network. In addition, the definition requires that within specific lookback periods, certain persons closely related to the network project have not held or controlled over 20 percent of the network’s outstanding tokens or voting power, contributed intellectual property that materially changed network functionality, or marketed the network or its tokens or issued those tokens, and that certain token issuances were nondiscretionary.

Although it’s possible to quibble over certain details—such as the arbitrariness of a 20 percent holdings cut off and who qualifies as a closely related person—the definition incorporates some key decentralization features, namely the absence of: unified and discretionary control, reliance on or susceptibility to closely related parties’ material contributions or changes, and gatekeeping that excludes general users.

Decentralization is key to the regulatory framework proposed in the Discussion Draft because it is a core component (along with a network becoming “functional”) of the definition of a “digital commodity.” Digital commodities, as laid out by the Discussion Draft, do not require the same ongoing disclosures by issuers as other digital assets (though they are subject to listing disclosures on registered digital commodity exchanges) and may generally be offered and sold by any person other than a closely related party. Importantly, such digital commodities are expressly excluded from the definition of securities and are generally subject to the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC).

While the Discussion Draft framework is complex, this is largely an unavoidable consequence of the existing “byzantine” U.S. capital markets regulatory regime. Moreover, the framework is appropriately premised on the presence, or lack, of core risks that securities laws seek to address: information asymmetries from managerial bodies.

Even with a legal definition of decentralization that gets to the heart of managerial control, though, there’s the challenge of identifying decentralization in the wild. To address this, the Discussion Draft proposes a process where any person can seek to certify to the SEC that a network is decentralized. Certification will occur by default within 30 days unless the SEC issues a stay or rebuttal explaining its decision. Notably, the SEC will be able to reconsider certifications annually and, where appropriate, cancel them. The certifying party may appeal both initial SEC rebuttals, as well as later cancellations.

It’s probably inevitable that the process for certifying decentralization before a regulator is going to be an intellectually unsatisfying exercise in Gordian knot cutting. Helpfully, the certification process would allow “any person” to initiate a certification, which recognizes that in the case of a truly decentralized network, there’s no single party that must be the one to provide relevant information. For that same reason, the proposed appeals process should similarly allow any person—not just the initial certifying party—to appeal an SEC rebuttal or cancellation. This is particularly important in the case of the cancelled certification of a genuinely decentralized network, where the initial certifier may no longer be in a prime, or any, position to appeal.

Another wrinkle is that leaving the process to the SEC assumes crypto projects are properly subject to SEC jurisdiction unless proved otherwise. While some projects would appropriately begin life under SEC jurisdiction, others, like Bitcoin, would not. One way to resolve this would be to involve the SEC only where the network’s digital asset previously was part of a securities transaction, such as a traditional private offering or the novel exempt digital asset offering provided for in the Discussion Draft, and otherwise leave the process to the CFTC.

The Discussion Draft also grapples with the fact that, like tokens themselves, the marketplaces over which they trade also may be decentralized. And similar to how a lack of managers makes applying traditional securities regulation inappropriate, the lack of a financial intermediary in the case of a crypto marketplace makes applying traditional exchange regulations inappropriate as well.

Importantly, the Discussion Draft recognizes that decentralized finance (DeFi) is different from intermediated finance, and, in addition to defining DeFi, provides for the SEC, CFTC, and Government Accountability Office to provide DeFi studies to Congress. Further, the Discussion Draft expressly exempts from both securities and digital commodities exchange requirements certain “ancillary activities” related to operating a blockchain network, including compiling and validating transactions; operating a pool; providing computing and incidental transaction services; providing a user-interface to interact with a blockchain network; and developing, publishing, and maintaining a blockchain network or digital wallet software or hardware systems.

These provisions could be read to cabin off the activities of decentralized exchanges (DEXs), yet reasonable minds may disagree. For one, while SEC rule revisions under the Discussion Draft must permit disintermediated trading in covered assets, that such rules must be “consistent with what is necessary or appropriate in the public interest or for the protection of investors” suggests that at least disintermediated exchange of digital asset securities would likely face some degree of regulation. In addition, although the ancillary activities are broad enough and incorporate enough DEX-related concepts to be read to create exemptions for DEX activity, the fact that the definition of DeFi and listed ancillary activities are not coterminous leaves the question open to debate. To head off some of this ambiguity, the DeFi definition could, for example, state that it should not be construed to mean that DeFi is not otherwise covered by ancillary activities.

Finally, residual sources of potential regulatory landgrabs in the Discussion Draft’s framework should continue to be limited and clarified. In particular, there are several points where the framework would give the SEC and CFTC the authority to set standards or impose requirements on any basis that the agencies determine to be in the public interest.

Judging by SEC Chair Gensler’s recent remark that “we don’t need more digital currency,” one such landgrab would seem to be transforming the SEC into the merit regulator it never was meant to be. To borrow a line from House Agriculture Committee Chairman GT Thompson (R‑PA) at Tuesday’s hearing, the SEC’s current approach is no way “to govern a market, adequately protect customers, or promote innovation.” The Discussion Draft offers an opportunity to reverse this course and bring clear thinking to crypto policy.

Reports that Donald Trump has been indicted on federal charges of mishandling classified documents, obstruction of justice, and conspiracy raise a host of mind-boggling questions, including whether it is possible for someone to run for president while incarcerated, whether a newly elected president can pardon himself, and whether President Biden will, in order to avoid the spectacle of the federal government prosecuting a declared presidential candidate during an election, pardon Trump preemptively.

Other questions include whether prosecutors can induce Trump to—as the vast majority of defendants do—waive his right to a public jury trial and plead guilty (doubtful), whether the case will be televised if it goes to trial (also doubtful—and shameful), and whether prosecutors can secure a unanimous guilty verdict from a jury in Southern Florida, where prosecutions of public figures are notoriously difficult. Regardless of how the prosecution ultimately plays out, it will likely represent a stress test both for the criminal justice system and constitutional provisions that have rarely—if ever—been explored or invoked. Buckle up—it’s going to be a wild ride.