Despite requests for international unity on financial regulations following the 2008 financial crisis, it is unlikely that the United States will follow Europe in the exploration of a single regulatory regime for "cryptoassets", both for models of payment as bitcoins or utility tokens that have been touted by celebrities as they do not invest.
The US approach, which has been reiterated several times by regulators, consists of applying rules and standard tests ranging from the years 30 to the fintech or financial technology products to determine whether the agencies have authority over them.
Cyrptocurrencies such as bitcoin and ethereum are not securities, according to the Securities and Exchange Commission, and will not be disclosed under the Federal Securities Act. But the tokens and offers that present and market the profit potential based on other entrepreneurial efforts contain the hallmarks of a security under US law.
This line, initially designed as the price of cryptocurrency and the initial coin offerings that exploded in 2017, has only become clearer over time.[[[[Podcast: the EU will move first on cryptographic rules. Will the United States follow?]
William Hinman, director of corporate finance at SEC, noted last year that the agency thinks that a digital currency like bitcoin is just a code and not an investment contract. However, the assets could be grouped and sold in order to constitute a security offer.
Likewise, digital tokens offered for sale in early coin offerings, known as ICO for short, are not securities, but are often sold or marketed in a way that makes them securities.
Judgment of the Supreme Court
The Supreme Court ruled in the reference case of 1946 SEC v. Howey an investment contract occurs when the money is put into a joint venture with the expectation of profit from the entrepreneurial efforts of others. The case concerned an innkeeper named W.J. Howey who sold citrus fruit to guests. The Supreme Court established that Howey did not sell real estate, but rather the possibility of taking advantage of the work that others have done in the citrus groves.[[[[EU reports on criptodasset regulation could have global resonances]
ICOs often promote their ability to create a new innovative application of blockchain technology in which, similar to the Howey case, investors who buy coins are not actually doing the job, but they buy these tokens to make a profit in the future.
"The buyer usually has no choice but to rely on the promoter's efforts to build the network and make the business a success," Hinman said. "At that point, the purchase of a token seems very similar to a bet on the success of the company and not on the purchase of something used for the exchange of goods or services on the network."
Without a regulatory framework governing ICOs, investors could be endangered, underlining why the ICOs should be controlled by the SEC, he said.
For cryptocurrencies like bitcoin, the absence of a third-party integrator for the company has excluded them from the SEC regulation. However, determining whether an asset is a security is not governed by the type of asset.
The SEC could oversee the trade in bitcoins, or other cirrhocents such as ethereum, if economic circumstances conform to Howey's test.
"Even digital assets with utilities that function exclusively as a means of exchange in a decentralized network could be packaged and sold as an investment strategy that can be a security," Hinman said in a speech in July. "If a promoter placed bitcoins in a fund or trusted and sold interests, it would create new security." Similarly, investment contracts can be made on virtually any activity, including virtual assets, provided the investor is reasonably expecting profits from the promoter's efforts. "
In November, the SEC offered further guidance, providing examples of the enforcement actions taken against various cryptoasset initiatives.
Path to compliance
The agency has entered into two agreements that month in which the parties have agreed to register digital tokens with the SEC and to make periodic statements after the agency has determined that investors must receive the disclosure required by the Securities Act of 1933 for certain offers and sales of digital assets.
"These two aspects show that there is a path to compliance with federal securities laws in progress, even when issuers have conducted an illegal, unregistered offer of digital asset securities," said T & C. agency at the time.
SEC staff also solicited fund operators investing in digital resources or advising others on such investments to be aware of the registration, regulatory and fiduciary duties under the Investment Company Act of 1940 and the Investment Advisers Act of 1940.
In one case, a September SEC order found a hedge fund guilty of an illegal and non-exempt public offering. In this case, the fund invested more than 40 percent of its assets in digital securities and participated in a public offering.
For trade in digital goods, the agency's supervisory authorities focused on the fact that the business requires registration as a stock exchange or broker-dealer.
For example, the agency has taken action against a market that has been billed as a "superstore" of digital currency that has brought buyers and sellers of digital securities together without registering with the SEC. The organization allowed investors to make purchases and acted as a reseller by purchasing and reselling digital tokens.
"Entities using blockchain or distributed ledger technology for trading digital assets should carefully review their assets on an ongoing basis to determine whether the digital assets they trade are securities and whether their businesses or services lead them to meet the definition of an exchange, "the staff said at the time.
And in a highly publicized case, the November agency dismissed the allegations with hip-hop music producer DJ Khaled and boxer Floyd "Money" Mayweather Jr. for not disclosing the payments received to promote investment in initial coin offerings – the first cases to be charged to propagate the violations involving ICO.
If the United States were to deviate from its current path, it could require legislative intervention. But this seems unlikely, especially with members of Congress who intend to fintech as a job creator and an advantage for the US technology industry.
This seems to be the thinking of the Congressional Blockchain Caucus, a bipartisan group that promotes digital ledger technology, whose members claim it will offer benefits beyond its use in digital resources. Blockchain is the digital ledger that supports bitcoins, even if it is used to track more than just digital currency transactions.
Representatives Tom Emmer, R-Minn. And Bill Foster, D-Ill., Two of the 19 members of the group, observed that the blockchain was explored in Cook County, Illinois, to rework the county's "land registry", an official land register, in an attempt to create a non-falsifiable ledger that would reduce fraud and could be used in many legally binding registries.
Emmer said the Congressional Blockchain Caucus wants to facilitate the innovation of technology for use in areas such as logistics, transport, food safety and health care. He called on the US government to slightly adjust emerging technology.
"There are several types of applications that I think is incredibly important to keep in mind that this light approach from the government would be very useful to allow that innovative process to grow," said Emmer.
He said there should be more collaboration between regulators and innovators with experience in technology. But it went further, arguing that there is no solid definition of what constitutes a security between digital resources, unlike currencies and commodities.
Get the latest alerts and much more from Roll Call on your iPhone or Android.