Cryptocurrency regulations may become clearer in the near future in the United States! 2 congressmen introduced a bill Thursday that would specifically exclude cryptocurrencies and digital currencies from the decades-old definition of a security. Cryptocurrency regulations are something that we’ve been wanting for months now – it’ll help bring clarity to the market.
The legal definition of what a security is – and isn’t – might not seem significant, but it significant enough for those in the cryptocurrency to loudly call for a change, citing the law is outdated.
The bill, the “Token Taxonomy Act”, is a bipartisan effort by Representatives Warren Davidson (R-OH) and Darren Soto (D-FL) that would define a “digital token” and would clarify that securities laws would not apply to cryptocurrencies – the caveat being that the recognition would be given once the token becomes a fully functioning network.
“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,” Davidson said in a statement.
One of the chief concerns for lawmakers and regulators (including the SEC) is consumer protection. Retail investors got wiped out in 2018 when they made speculative bets on Bitcoin and other cryptocurrencies – many have lost more than 90% of their highs of last year. Bitcoin is down 71%. XRP is down 85%.
At issue by cryptocurrency enthusiasts and participants is the idea of applying a 72-year-old securities law to digital currencies and cryptocurrencies. The SEC uses what’s known as the “Howey Test” – a test derived from a US Supreme Court decision from 1946 which involved a citrus farmer in Florida – to determine whether or not a cryptocurrency is a security.
The Supreme Court has determined that any transactions that qualify as “investment contracts” are considered securities. Per the SEC – an investment contract exists if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
Experts say that those standards, while they’ve served their purpose for traditional securities, should be more nuanced for digital assets. The reason? Many cryptocurrencies also serve as blockchain software platforms. This means that you can build applications on top of those cryptocurrency’s blockchain software, such as Ethereum. They are also capable of being traded without an intermediary – separating them vastly from the average stock on an exchange such as Nasdaq.
“These decentralized networks don’t fit neatly within the existing regulatory structure… This is a step forward in finding the right way to regulate them” said Kristin Smith who heads the Blockchain Association. The Blockchain Association is the first lobbying group in Washington that represents the interests behind Bitcoin.
The Chairman of the SEC, Jay Clayton, has been clear that he does not intend to update the standards that every securities in the US has gone through since 1946 to cater to cryptocurrencies. The chairman said earlier this year at a Senate hearing that every Initial Coin Offering (ICO) he has “seen is a security.” The agency did make an exception for two cryptocurrencies that have explicitly been said not to be securities – Bitcoin and Ether – which they regard as commodities and regulated by the Commodities Futures Trade Commission.
The aforementioned bill seeks to amend and change the Securities Act of 1933 and the Securities Exchange Act of 1934. While the SEC won’t change their stance, Congress can.
The Bill also directs the Internal Revenue Service (IRS) to adjust taxation of virtual currencies. They’re calling for the IRS to create a tax exemption for exchanges of one virtual currency for another and to create a “de minimis” exemption from taxation for gains realized from sales or exchanges of digital currencies.
While this bill is largely symbolic – today is the most likely to be the last day that Congress is in session – the bill might be reintroduced next year when Democrats are in control of the house.
