New Jersey bill eyes classification of digital assets as securities

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A bill proposed in the state of New Jersey would classify digital assets sold to institutional investors as securities, including stablecoins.

The New Jersey General Assembly may vote on a bill that would classify digital assets sold or issued to institutional investors as securities in the state. Digital assets are currently not mentioned in New Jersey securities law, so the proposed bill would amend the current legislation. It would also join two further digital asset-related bills awaiting approval by the state’s governor.

The draft text of the bill, introduced by Democratic Assembly member Herb Conaway, Jr. on November 30, “classifies all virtual currencies issued and sold to institutional investors as securities.”

It defines institutional investors as “a company or organization that invests money on behalf of other people,” as well as specifying that the definition of “virtual currency” should include “a digital asset that is determined by the bureau to be a stablecoin.”

The proposed legislation would only apply to transactions governed by New Jersey law and would not impact the federal Securities and Exchange Commission (SEC), which oversees securities law nationwide.

The SEC already views all digital assets sold to institutional investors as securities, so even if the New Jersey bill was applied in the state, it would not change how the regulator oversees the space.

However, it does at least provide further validation and legal precedent for the SEC to continue on its current approach.

The SEC, securities, and Howey

The regulator has been the subject of bitter recrimination from the industry and several lawmakers over a perceived jurisdictional overreach.

The SEC bases its asset classifications on the Howey Test, which states that an asset is a security if:

1. It is an investment of money;
2. In a common enterprise;
3. With an expectation of profits;
4. Solely from the efforts of others.

If an asset meets these four criteria, it can be seen as an “investment contract,” a form of asset written into securities law.

The SEC has consistently argued that almost all digital assets, barring only Bitcoin and Ethereum, meet these Howey Test criteria and are thus securities under U.S. law.

There has been particular friction within the industry over the difference between sales to institutional investors and those sold on the secondary market, e.g., in exchanges via programmatic sales.

Companies such as Ripple and later Terraform Labs have argued in their lawsuits against the SEC that the latter type of asset sale does not meet the Howey criteria of having an “expectation of profits, solely from the efforts of others.” The Ripple Judge agreed, but the Terraform Labs Judge didn’t, creating something of a stalemate in the debate.

Unfortunately, the proposed New Jersey bill would not help solve this debate as it makes no mention of secondary market or programmatic sales, but if approved, it might provide further evidence for the SEC that it’s on the right path when it comes to institutional investors.

Further digital asset bills

The New Jersey legislature has currently been busy in the digital asset space. It recently passed two bills, the Virtual Currency and Blockchain Regulation Act and the Digital Asset and Blockchain Technology Act, which are now awaiting action by the governor.

The Virtual Currency and Blockchain Regulation Act would provide regulation for consumer digital assets and decentralized autonomous organizations, while the Digital Asset and Blockchain Technology Act would require the state Department of Treasury to review and approve “a viable blockchain-based, digital payment platform” to provide payment services to businesses in the state that don’t have access to traditional financial services and are forced to operate in cash-only or cash-heavy environments. The platform would use a stablecoin pegged to the U.S. dollar to facilitate audits, compliance, and local tax payments.

Watch: The future of digital asset trading