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Bitcoin and Crypto Regulation

Over the course of October, we saw ​​Coinbase and a16z pitch their ideas for crypto regulation. Coinbase wants to block the Securities and Exchange Commission (SEC) from being the primary regulator over crypto, and instead create a special regulator for digital assets. Coinbase’s plans will be released publicly in the near future, but has stated that it believes crypto users face uncertainty about which federal agencies should oversee the industry. 

Their comments could not be any more appropriate as the Commodity Futures Trading Commission (CFTC) chairman recently stated “nearly 60% of cryptocurrencies are commodities” and that his team is positioned to lead regulations over the market. Meanwhile, SEC chairman Gary Gensler has continually commented that many cryptocurrencies, including stablecoins, are no different than securities and, as such, should fall under his sphere of influence in the name of “consumer protection.” 

In addition to all of this, the Biden administration is reportedly considering an executive order for cryptocurrencies that would create a government-wide approach to regulation in the space. In more regulation news, Do Kwon and Terraform Labs, of the crypto project LUNA, filed a complaint against the SEC claiming that when the agency subpoenaed Kwon back in September it violated the 14th amendment's due process clause as well as SEC rules and federal regulations. 

Also in October, the Financial Action Task Force (FATF) (an unelected group of individuals that pass down global financial recommendations, mind you) released its updated guidance for cryptocurrencies in which they look to shoehorn the 21st-century nascent industry into the existing regulatory framework for 20th-century banks. 

Lastly, President Biden’s Working Group on Financial Markets finally released its report on stablecoins and the risks they may pose to the financial system. The report provides “guidance” like calling for Congress to establish new laws that would limit which types of entities can issue stablecoins. 

One exception to the regulatory scrutiny is El Salvador, who as of June 2021, passed a bill making Bitcoin legal tender in the small Central American country. This law passing allows bitcoin to be used to pay taxes, businesses are mandated to accept bitcoin, and there will no longer be capital gains taxes levied on bitcoin transactions (in El Salvador) now that it is treated as currency. This marks the first time a nation has formally recognized a cryptocurrency as a currency.

Because cryptocurrencies largely operate outside the conventional financial system and securities laws, regulators are trying to find a balance between obstructing a world-changing technology and ensuring the technology is not used for illegal activities. In 2015, the CFTC outlined its stance regarding BTC as a commodity and that it would be regulated as such. The general consensus of today is that bitcoin does not fit the definition of a security and is viewed more as property in its current state.

As for precedent, and in order to estimate the likelihood any particular crypto asset will be classified as a security the most common legal test is known as the Howey Test, the four-component questions of which are listed below:

1.        Is there an investment of money?

2.        Is there an expectation of future profits?

3.        Is the investment of money in a common enterprise?

4.        Do any profits come from the efforts of a promoter or third party?

When examined through the lens of the Howey Test, it does not appear that one could make a case that BTC should be classified as a security. While there is an investment of money, and most investors do expect future profits (although not in the form of dividends, for example), the definitional question of what constitutes a “common enterprise” is a difficult one rife with ambiguity. Most importantly, however, is the answer to the final question; it would be difficult to argue that the profits that would result from an investment in BTC are the product of the efforts of a singular party.

With every passing year, Bitcoin gains legitimacy in the eyes of people, institutions, and governments. It now seems more likely than not that bitcoin will usher in the new era of crypto assets and find a way to coexist with governments around the world. One prime example of this legitimacy is on Monday, October 18th, 2021, the first-ever U.S. Bitcoin ETF (ProShares ETF under the ticker “BITO”) launched on the New York Stock Exchange (NYSE).

Globally speaking, the issue varies from country to country. However, only a handful of countries have outright banned bitcoin including notables like Afghanistan, Pakistan, Saudi Arabia, and as of September 2021, China.