13: Regulation
In the US today, an asset is classified as a commodity or a security based on if it is considered an “investment contract” or not, meaning does it fail or pass“The Howey Test,” respectively. The Howey test is a legal test used in the United States to determine whether a transaction qualifies as an investment contract and, thus, is considered a security under federal law.
The name comes from the U.S. Supreme Court’s SEC v. W.J. Howey Co. case in 1946. If the transaction in question is deemed as passing the test, meaning it is deemed a security, then it is “subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934” (source).
Now, what is this test?
“The U.S. Supreme Court's Howey case and subsequent case law have found that an "investment contract" exists when there is
the investment of money
in a common enterprise
with a reasonable expectation of profits
to be derived from the efforts of others.”
“The term "security" is defined broadly to include a wide array of investments such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts.
Generally, an "investment contract" is created when:
(1) a person invests something of value (usually, money)
(2) in a common enterprise
(3) with the expectation of a return (e.g., dividends or increased capital)
(4) to come through the managerial efforts of someone other than the investor.”
Now, how does bitcoin and ethereum fair in this test (imo)?
bitcoin: Fails —> Commodity
not a joint enterprise
doesn’t rely on work of others to increase its value
ethereum: Passes —> Security
PoS investors are pledging funds (in the form of tokens) to fund
an enterprise (ethereum & The Ethereum Foundation) with the intention of making profits from its efforts
the investing public is anticipating profits based on the efforts of the others
Regulation is messy.
Some call for improved regulation. Others, say it’s fine. Over the past couple years, we’ve seen quite a lot of development in the space of regulation. Most recently, in regards to Ripple’s token XRP.
Natalie Smolenski is one of the voices I most appreciate in bitcoin, and I enjoyed her recent article in Forbes:
Here is a rough timeline of bitcoin regulation:
Bitcoin:
was defined as a virtual currency and payment system by the U.S. Treasury as early as 2013
considered a commodity under the Commodities Exchange Act by the CFTC in 2014
classified as property by the Internal Revenue Service for income tax purposes in 2014
In 2021, an infrastructure bill passed by Congress treated bitcoin as physical cash, mandating reporting of transactions over $10,000 in value.
Congress has:
Introduced over 50 bills regarding digital asset taxation, classification, regulatory treatment, stablecoins and central bank digital currencies (CBDCs). Examples include:
21st Century Dollar Act (H.R. 3506)
Keep Innovation in America Act (H.R. 6006)
Blockchain Regulatory Certainty Act (H.R. 5045)
In June ‘22, two senators, Cynthia Lummis (R-Wyo.) and Senator Kirsten Gillibrand (D-N.Y.), submitted landmark legislation aimed to provide specific solutions to most of crypto’s quagmires:
differentiating a security token from a digital commodity
providing clear tax policies, called the Responsible Financial Innovation Act of 2022 (RFIA).
Held at least 15 hearings focused on cryptocurrency and blockchain policy in 2022. The most active committees were the Senate Banking Committee and House Financial Services Committee.
House Financial Services Committee under Chairperson Patrick McHenry (R-N.C.) created the first body dedicated to digital assets. Dubbed the House Subcommittee on Digital Assets, Financial Technology, and Inclusion, it will be led by Representative French Hill (R-Ark).
Some tracking websites:
