Venture capital firm Andreessen Horowitz (a16z) is calling on US lawmakers to revise a draft crypto regulation bill, warning that the proposed framework could open dangerous loopholes and undermine investor protections.
In a Thursday open letter to the US Senate Banking Committee, the investment firm suggests that the regulators should close loopholes in the draft crypto legislation. The letter is a response to the discussion draft released in late July.
The discussion draft in question builds on the 21st Century Financial Innovation and Technology Act (CLARITY Act) and seeks industry input on the ongoing crypto regulation. A16z points to the definition of ancillary assets, referring to tokens sold with an investment contract that give buyers no equity, dividend or governance rights.
“The ancillary asset construct should not serve as the foundation for legislation without significant modifications,” the letter reads.
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A16z pushes for “digital commodity” model
A16z said the current approach fails to resolve the core issues facing crypto markets and would be incompatible with the Howey test, the long-standing legal benchmark for defining securities.
The investment firm said this approach “will not resolve the challenges facing crypto market participants.” Instead, the firm recommends adopting the CLARITY Act’s narrower “digital commodity” framework, which it says would provide greater certainty while preserving regulatory simplicity.
A16z also claimed that “the Howey test remains a critical component of US securities law” and should remain in its current form. Its suggested solution is to “codify a modernized application suited to ancillary assets.”
It described the proposed changes to the Howey test as “unnecessary—and dangerous—because it seeks to rewrite Howey in a way that departs from settled law and undermines investor protections”:
“These changes are not merely problematic—they are incompatible with the broader architecture of U.S. securities law.“
Insider sales should be limited
A16z also said that applying securities law to primary transactions and commodity regulations for secondary transactions creates a loophole, allowing issuers to sell ancillary assets to insiders under exemptions, and then resell in the public market without falling under securities regulations.
As a solution, the investment firm suggested requiring the projects to achieve decentralization by eliminating mechanisms of control. Applying transfer restrictions through those means “can close loopholes that would otherwise arise,” the letter states.
According to a16z, this would also prevent insider enrichment at the expense of public investors and ensure that the distinction between the primary and secondary markets remains meaningful:
“Once control is relinquished and the project is decentralized, those restrictions should fall away, as the asset’s trust dependencies now resemble those of a commodity.“
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A control-based decentralization framework
The firm suggests that regulators should adopt a control-based decentralization framework, which it says “is the appropriate way to evaluate the evolution of an ancillary asset’s risk profile.”
The letter explains that this approach “should be focused on whether any party retains unilateral authority—operational, economic, or governance—over the blockchain system.” This, according to the investment firm, should be considered when applying the Howey test:
“Howey should not be abandoned. Instead, Congress should codify the principles underlying Howey for assets under a control-based decentralization framework.”
Protect the plumbers, not the pipes
A16z further says that the US Securities and Exchange Commission’s (SEC) past focus on the “efforts of others” aspect of the Howey test “has created significant perverse incentives.”
It claims this leads to lower transparency, exposes users to undisclosed risks and stalls innovation. The letter also suggests that being involved with the technology at the basis of crypto should not infringe on securities law.
“Legislation should clarify that core technology functions necessary for the operation of decentralized blockchain systems — such as running consensus algorithms, mining, staking, and executing smart contracts — do not, in and of themselves, constitute regulated financial activity under U.S. securities or commodities laws,” the firm said.
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