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

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.”