Bitcoin is Not a Security, Here’s Why
The cryptocurrency industry has advanced so rapidly in 2017 that its economic output has surpassed the GDP of over 150 countries. The growth is unprecedented, and with it comes the responsibility to make sure we operate within the confines of the law.
I am excited about what this means for our industry from both a technological and regulatory standpoint. However, I’m concerned that there is confusion around what Bitcoin actually is — a blockchain-based digital asset (like gold) or a security (like stocks). Unfortunately, some have confused the two, possibly due to their lack of understanding of how Bitcoin works.
In order to clarify, I’ll explain why Bitcoin is not a security and what it does.
Bitcoin is Not a Security
When Warren Buffet defines something as “a security” his definition matters because he’s one of the wealthiest investors in American history. His philosophy is simple: buy something you understand at a price that makes sense today and hope its value increases over time (and doesn’t go bankrupt). But even though this strategy sounds simple enough, it hasn’t always worked out when applied to cryptocurrencies.
In fact, Buffett has been quoted as saying “Stay
Bitcoin is Not a Security, Here’s Why
Bitcoin is not a security. It is a currency or a commodity, depending on who you ask. Bitcoin is certainly not a security. That much has been made abundantly clear by the US Securities and Exchange Commission (SEC).
The SEC released an extensive report earlier this week explaining why they do not view bitcoin as a security. It all comes down to one thing: there’s no central entity issuing bitcoin in exchange for investment funds. Bitcoin is decentralized and open source: anyone can run their own node, download their own copy of the blockchain, and even contribute to the development of bitcoin through GitHub.
Bitcoin Miners Don’t Issue New Shares in Exchange for Investment Funds
The SEC’s report discusses the “Howey Test” for determining whether something is a security. Under that test, Bitcoin does not qualify as a security because it does not fall under any of the four categories:
It doesn’t involve any investment of money;
It doesn’t have an expectation of profits based on a common enterprise;
There are no profits that come solely from the efforts of a promoter; and
There is no central third party whose actions affect the success of the project
Bitcoin is not a security. It just isn’t. In fact, the SEC has already called Bitcoin a commodity. This is a big deal because if it were a security, it would have to be regulated by the SEC and other government agencies.
Bitcoin Is Not A Security – Here’s Why
Security: An investment contract into an enterprise (according to Howey Test).
Commodity: Tangible or intangible things that are fungible (can be traded for each other) and interchangeable.
Bitcoin is Not a Security Explained
The most popular test for determining whether or not something is a security is the Howey Test. This test determines whether or not an investment contract exists in certain transactions. To pass the Howey Test, three conditions must be met:
1) There must be an investment of money2) The investment must be in a common enterprise3) The investor must expect profits solely from the efforts of others.
So, let’s apply this to Bitcoin!1) There must be an investment of money
Yes, you can buy/sell/trade Bitcoin with fiat currencies as well as other crypto assets such as Ethereum and Litecoin, but this does not mean that all investors are investing money into Bitcoin to make a profit off of
We’ve been asked a lot of times whether Bitcoin is a security or not (and if we’re a securities exchange). So we wanted to clear it up once and for all. Because we’re the first cryptocurrency exchange to be fully regulated in the U.S., we hope this will set an example for others to follow.
Bitcoin is not a security; it is an asset that is traded as an investment, and we have received no direction from the SEC or any other regulators to date that would change this analysis.
We believe that Bitcoin and other virtual currencies are commodities, just like oil, coffee beans, or wheat. These commodities can be bought and sold at prices determined by supply and demand — in the same way someone might purchase orange juice futures to hedge against citrus crop losses.
And cryptocurrencies, which are based on distributed ledger technology (DLT), have similar characteristics: They can be used as instruments of value, they derive their value from supply and demand, they are a medium of exchange, they can be stored and transported electronically, they can be divided into smaller units or combined into larger units, they can serve as a unit of account, and they are fungible.
The US Securities and Exchange Commission (SEC) and other regulatory bodies have been viewing cryptocurrencies as securities. The SEC has issued subpoenas to several crypto companies, and it’s also considering Ether as a security.
However, in a recent blog post by Coinbase, the exchange’s Chief Legal and Risk Officer Mike Lempres clearly states that Bitcoin is not a security.
Lempres doesn’t see Bitcoin or Ethereum as securities due to the following reasons:
1) They were “sufficiently decentralized” before they were listed on exchanges;
2) The network of miners are paid in the currency of the coin;
3) They had a functional utility before being listed on exchanges.
Even though the SEC has not yet decided the fate of Bitcoin, Coinbase believes that if it does happen, it will have minimal impact on their business and customers.
Well, the SEC released a statement on March 7th 2018 entitled “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets”, and in my opinion, they completely missed the point. The SEC starts by saying that they have become increasingly concerned about fraudulent schemes involving cryptocurrencies, ICOs, and other digital assets. They say that if a company uses blockchain technology to raise money through an ICO and then uses the funds to build a platform to buy or sell digital securities and/or other digital assets, they may be operating as an unregistered exchange.
And here is where I disagree with them. Bitcoin is not a security. Bitcoin is a currency and payment network (Bitcoin Core is just one implementation of that network), and it can be used to buy things. You can buy a Tesla car with Bitcoin, you can buy pizza with Bitcoin, you can buy pretty much anything you want with Bitcoin. And those transactions take place on the Bitcoin network without any 3rd party involved (okay, there may be one or two trusted 3rd parties involved).
Bitcoin has been designed from its creation to be used without 3rd party involvement as much as possible (unless you want to use 3rd party services). This means that using Bitcoin does not require anyone’s permission or
A U.S. district court judge has ruled that Bitcoin is a form of money just like any fiat currency. It’s official, folks!
In 2017, the U.S. Commodity Futures Trading Commission (CFTC) filed charges against a company called CabbageTech and its principal Patrick McDonnell for allegedly defrauding investors by making false claims about investing in cryptocurrencies and engaging in virtual currency “pump-and-dump” schemes.
According to the CFTC, McDonnell had sold advice on trading cryptocurrencies through a website called Coin Drop Markets and solicited customers to send him money in order to purchase virtual currencies on their behalf. Once the customers sent him funds, however, he quickly converted the funds into his own personal use.
After a two-day bench trial, U.S. District Judge Jack Weinstein for the Eastern District of New York found McDonnell guilty of committing fraud which included six counts of commodities fraud and four counts of making false statements to investigators from the CFTC.
McDonnell’s sentencing hearing is set for July 18th at 2 pm EST while he faces up to 90 years in prison.