Venture capital firm Andreessen Horowitz (a16z) has urged US lawmakers to revise a draft bill on crypto regulation, warning that the proposed framework could create dangerous loopholes and weaken protections for investors.
In an open letter addressed to the US Senate Banking Committee on Thursday, the firm called on regulators to tighten the draft legislation. The letter was written in response to the discussion draft released in late July.
The draft builds on the 21st Century Financial Innovation and Technology Act (also known as the CLARITY Act) and seeks feedback from the industry on crypto regulation. A16z specifically raised concerns about the definition of “ancillary assets,” which refers to tokens sold alongside an investment contract but that do not provide buyers with equity, dividends, or governance rights.
“The ancillary asset construct should not serve as the foundation for legislation without significant modifications,” the letter stated.
A16z pushes for “digital commodity” model
A16z stated that the current approach does not address the fundamental challenges facing crypto markets and is inconsistent with the Howey test, the long-established legal standard for defining securities.
The firm argued that this approach “will not resolve the challenges facing crypto market participants.” Instead, it recommended adopting the CLARITY Act’s more focused “digital commodity” framework, which it believes would offer greater clarity while maintaining regulatory simplicity.
A16z also emphasized that “the Howey test remains a critical component of US securities law” and should remain unchanged. As a potential solution, it suggested “codifying a modernized application tailored to ancillary assets.”
The firm described proposed modifications to the Howey test as “unnecessary—and dangerous—because they seek to rewrite Howey in a way that departs from established law and weakens investor protections.” It further added:
“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 warned that applying securities laws to primary transactions while regulating secondary transactions under commodity rules creates a loophole. This loophole would allow issuers to sell ancillary assets to insiders using exemptions, who could then resell them in the public market without being subject to securities regulations.
As a solution, the firm recommended that projects must achieve decentralization by removing mechanisms of control. Implementing transfer restrictions through these means, the letter explained, “can close loopholes that would otherwise arise.”
According to A16z, this approach would also prevent insiders from profiting at the expense of public investors and maintain a clear distinction between primary and secondary markets.
“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.“
A decentralization framework centered on control
The company urged regulators to adopt a control-based decentralization framework, describing it as “the appropriate way to assess the evolving risk profile of an ancillary asset.”
The letter emphasized that this approach “should focus on whether any party retains unilateral control—whether operational, economic, or governance—over the blockchain system.” According to A16z, this factor should be taken into account 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.”
Safeguard the plumbers, not the pipes
A16z also criticized the US Securities and Exchange Commission’s (SEC) previous emphasis on the “efforts of others” element of the Howey test, saying it “has created significant perverse incentives.”
The firm argued that this focus reduces transparency, exposes users to hidden risks, and hinders innovation. The letter further stated that involvement with the underlying technology of crypto should not trigger securities law.
“Legislation should clarify that core technological functions essential to the operation of decentralized blockchain systems—such as running consensus algorithms, mining, staking, and executing smart contracts—do not, by themselves, constitute regulated financial activity under US securities or commodities laws,” the letter explained.
