Congress Members Seek to Exclude Cryptocurrencies from the Definition of a Security

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Regulatory clarity on the legal status of cryptocurrencies may
arrive sooner than expected after two members of the U.S.
Congress proposed a bill to exempt digital tokens from the
definition of traditional securities, reported CNBC on December
20, 2018.

Crypto not a Security
The proposed bill excludes digital currencies from the decades-old
definition of a security; which applies to a variety of financial
instruments and broadly refers to all types of tradable assets that
hold monetary value for the holder.
While changing the definition might be a slight change for the
global financial industry, it stands to change the future of the
billion-dollar cryptocurrency market, especially for all token
startups and ICOs that have their products treated as traditional
securities and face criminal charges for promoting such offerings.
Termed the “Token Taxonomy Act,” the bipartisan effort is
spearheaded by Warren Davidson and Darren Soto from the
jurisdictions of Ohio and Florida respectively. As per the proposal,
security laws should “not apply to cryptocurrencies once they
become a fully functional network.”

In a statement, Davidson noted:
“In the early days of the internet, Congress passed
legislation that provided certainty and resisted the
temptation to over-regulate the market. Our intent is to
achieve a similar win for America’s economy and for
American leadership in this innovative space.”

Consumer protection and prevention of investment fraud forms a
significant concern for regulators and lawmakers impeding the
growth of digital assets . The hindrance is justified; investors have
lost over $670 billion in 2018 as the cryptocurrency market fell
from a valuation of $800 billion in January 2018 to a modest
$129 billion in December 2018. The losses can be attributed to a
diversity of big-name digital assets like bitcoin, ether, XRP, and
dash, in addition to hundreds of obscure ICOs and ambitious
cryptocurrency projects.

Exclusion may be a Long Way Ahead
Despite the lack of functional products and notable use cases,
token startups and cryptocurrency proponents challenge the idea
of applying the Howey’s Test , a 72-year-old securities test, to
digital currencies. Interestingly, the law was first introduced in
1946 after a U.S. Supreme Court decision involving a citrus fruit
farmer.

At the time, the Supreme Court determined any transactions were
defined as “investment contracts” if a person invested his/her
money in an enterprise with the expectation of profits in the future,
solely from the efforts of a promoter or equivalent third party.
However, experts believe cryptocurrencies are more than an
investment vehicle, starting from the range of uses they offer to the
suite of blockchain applications that can be built on a currency’s
underlying network. Additionally, they do not necessarily require a
third-party intermediary to facilitate trade, instead relying on a
peer-to-peer network of users present worldwide.

Currently, only bitcoin and ether are regarded as commodities by
the U.S. lawmakers, owing to their inherent decentralized nature
and the lack of a central body leading developments and marketing
activities for the two currencies.

Meanwhile, the asset class may have a long way to go before the
Congress bill is passed. In 2018, U.S. Securities and Exchange
Commission chairman Jay Clayton explicitly mentioned that
standards relating to financial instruments would not be updated
to cater to cryptocurrencies. He later stated in a Senate hearing
that “every offering he has seen is a security.”

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