Andreessen Horowitz Exposes Critical Flaws in Proposed Crypto Legislation – Is Regulation Falling Behind?

Silicon Valley's crypto heavyweight calls out Washington's half-baked attempt at digital asset rules.

Policy Gaps Threaten Innovation

a16z's sharp-eyed legal team spotted loopholes big enough to drive a Bitcoin mining rig through. The draft bill—touted as comprehensive—misses key DeFi nuances while over-regulating centralized players. Classic bureaucratic overreach meets technological ignorance.

The Compliance Paradox

Lawmakers want blockchain transparency but ignore how smart contracts actually work. Proposed KYC requirements could cripple decentralized protocols while doing nothing to stop bad actors. Another case of finance dinosaurs writing rules for the quantum age.

VCs Enter the Regulatory Arena

When $7B in crypto AUM speaks, Congress might finally listen. a16z's critique drops as institutional adoption hits record highs—proving yet again that real financial innovation happens despite regulators, not because of them.

a16z Warns Draft Crypto Bill Missteps on Ancillary Assets

While the draft seeks to clarify the regulatory landscape for digital assets, a16z argues that the framework as written poses legal and structural risks, especially around the treatment of “ancillary assets.”

Ancillary assets refer to digital tokens sold alongside investment contracts, typically without providing buyers with equity, dividends, or governance rights.

a16z said using this category as the foundation for new legislation “without significant modifications” is problematic.

The firm believes this structure contradicts the Howey test, which is the longstanding legal standard for determining whether an asset qualifies as a security under U.S. law.

“Rewriting Howey,” the letter stated, “would depart from settled law and endanger investor protections.”

Instead, a16z supports the CLARITY Act’s narrower definition of “digital commodities” and recommends codifying a control-based decentralization model.

This WOULD assess whether any party retains unilateral control, operational, financial, or governance, over a blockchain system.

According to the firm, decentralization should mark the point at which an asset transitions from a security to a commodity.

Crypto provides a counterbalance to AI systems, decentralizing something that tends to centralize.

So what are builders actually working on? And what challenges still need to be solved?

The @a16zcrypto team shares 11 use cases at the intersection of crypto x AI — from universal… pic.twitter.com/8o7oOGcNN9

The firm also criticized the bill’s proposed distinction between primary and secondary markets.

It argued that allowing commodity regulations to govern secondary trading could enable issuers to offload tokens to insiders under exemptions, who could then resell them publicly without regulatory oversight.

a16z proposed that decentralization milestones be required before such exemptions apply, ensuring that investor protections remain intact.

a16z Urges Transfer Limits Until Full Decentralization

To close this gap, the letter recommends imposing transfer restrictions that phase out only after a project achieves genuine decentralization.

“Once control is relinquished,” the firm wrote, “those restrictions should fall away, as the asset’s trust dependencies now resemble those of a commodity.”

The letter also addressed the SEC’s past application of the Howey test, especially its emphasis on the “efforts of others” aspect.

a16z claims this approach has discouraged transparency and hindered innovation by pushing developers to distance themselves from projects to avoid legal risk.

Last month, the GENIUS Act, or the Guiding and Establishing National Innovation for US Stablecoins Act, passed the House with bipartisan backing, including votes from over 100 Democrats.