Andreessen Horowitz Warns Draft Crypto Bill Weakens Investor Protections

Andreessen Horowitz, one of the leading venture capital firms in the crypto space, has raised concerns regarding a draft U.S. crypto regulation bill, warning that key provisions could create legal loopholes and weaken investor protections [1]. The firm submitted a formal letter to the Senate Banking Committee on Thursday, responding to the discussion draft of the 21st Century Financial Innovation and Technology Act, also known as the CLARITY Act [1].

The draft bill aims to bring clarity to the regulatory landscape for digital assets, but a16z argues that its structure introduces potential risks, particularly in the treatment of “ancillary assets.” These are digital tokens sold alongside investment contracts without granting buyers equity, dividends, or governance rights [1]. The firm warns that relying on this framework “without significant modifications” could conflict with the Howey test, a longstanding legal standard for determining whether an asset is a security [1]. By redefining securities in this context, a16z suggests that the bill could undermine investor protections and create inconsistencies with existing legal interpretations [1].

The firm also criticized the bill’s proposed distinction between primary and secondary markets. It argues that allowing commodity regulations to govern secondary trading could enable token issuers to offload assets to insiders under exemptions, who could then resell them publicly without oversight [1]. To address this, a16z recommended tying token exemptions to clear decentralization milestones. It proposed implementing transfer restrictions that phase out only after a project achieves genuine decentralization, ensuring that investor protections remain in place [1].

According to the letter, decentralization is a critical marker for transitioning an asset from a security to a commodity. The firm supports the CLARITY Act’s narrower definition of “digital commodities” and recommends a control-based decentralization model that assesses whether any party retains unilateral control over a blockchain system—operationally, financially, or through governance [1].

The letter also addressed the Securities and Exchange Commission’s (SEC) application of the Howey test, particularly its focus on the “efforts of others” criterion. a16z claims this approach has discouraged transparency and innovation by pushing developers to disengage from projects to avoid legal liability [1].

The firm’s critique highlights the ongoing debate around how to regulate digital assets without stifling innovation. With the recent passage of the GENIUS Act in the House, which includes bipartisan support, the regulatory landscape continues to evolve. a16z’s concerns underscore the need for a balanced approach that ensures both legal clarity and the protection of market participants [1].

Source: [1] VC Firm Andreessen Horowitz Flags Gaps in Draft Crypto Bill (https://cryptonews.com/news/vc-firm-andreessen-horowitz-flags-gaps-in-draft-crypto-bill/)