By Florian Uffer

The recent rise of cryptocurrency has taken the financial universe by storm and left a significant level of uncertainty in the legal world. Due to its revolutionary concept and technologically advanced nature, relevant U.S. regulatory agencies have found it difficult to rightfully assert jurisdiction over it.

Cryptocurrency is an electronic cash system which does not rely on banks or third parties to verify transactions.[1]Rather, transactions are recorded on a blockchain, a digital ledger.[2]This blockchain is used to confirm upcoming transactions, thus enabling direct peer-to-peer payments.[3]It follows that,due to the bypass of financial intermediaries, cryptocurrency transactions are significantly quicker and cheaper than their financial counterparts.

Government currency is regulated by the Department of the Treasury and by the Federal Reserve, commodities by the Commodity Futures Trading Commission (“CFTC”), and stocks and securities by the Securities and Exchange Commission (“SEC”).[4]Cryptocurrency, however, lacks a single regulatory body.[5]The main hurdle facing regulators consists of a difficulty in properly classifying the range of cryptocurrencies that exist.[6]

In determining whether a certain asset classifies as a security, the SEC still uses a yardstick known as the Howey Test.[7]In SEC v. W.J. Howey Co., the Supreme Court elucidated that a transaction amounts to an investment contract[8]if (1) it is an investment of money, (2) the investment of money is in a common enterprise, (3) there is an expectation of profit, and (4) any profit comes from the efforts of a promoter or third party.[9]

In a hearing before the House Committee on Appropriations, SEC Chairman Jay Clayton slightly clarified the agency’s position on cryptocurrency. The SEC distinguishes between cryptocurrencies as a medium of exchange, such as Bitcoin or other alternative coins, and tokens.[10]According to Clayton, if a cryptocurrency is used as a medium of exchange, a replacement for currency, then it is likely not a security, and thus not within the jurisdiction of the SEC.[11]Contrariwise, tokens, generally used to finance projects, mainly fall within the realm of securities.[12]This financial area, according to Clayton, has not grown with the usual “respect” for the law which is expected to be seen in financial markets.[13]Although Clayton considers the SEC to be the proper regulator of tokens, the question as to the proper regulator for cryptocurrency as a medium of exchange remains unclear.[14]A main reason for this uncertainty consists of the fact that U.S. laws did not expect non-sovereign-backed currencies to appear.[15]

There consequently remains an issue as to the governance of cryptocurrency as a medium of exchange. Which agency will govern the matter is still ambiguous, and Clayton stated that the SEC is “not going to do any violence to the traditional definition of a security that has worked for a long time[,]” thus clarifying that the SEC would not change its approach to obtain jurisdiction over the entirety of cryptocurrency.[16]

 

[1]Adam Levy, What is Cryptocurrency?, The Motley Fool(Mar. 11, 2018, 7:15 AM), https://www.fool.com/investing/2018/03/11/what-is-cryptocurrency.aspx.

[2]See id.

[3]See id.

[4]See Stephen J. Obie & Mark W. Rasmussen,How Regulation Could Help Cryptocurrencies Grow, Harvard Business Review(July 17, 2018), https://hbr.org/2018/07/how-regulation-could-help-cryptocurrencies-grow.

[5]See id.

[6]See Daniel Araya, The Challenges of Cryptocurrency Regulation,The Regulatory Interview(Oct. 9, 2018), https://www.theregreview.org/2018/10/09/araya-challenges-cryptocurrency-regulation/.

[7]SeeKate Rooney, Congress Members Ask SEC Chairman for Clarity on Cryptocurrency Regulation, CNBC(Sept. 28, 2018, 10:26 AM), https://www.cnbc.com/2018/09/28/congress-ask-sec-chairman-for-clarity-on-cryptocurrency-regulation.html.

[8]“The term ‘security’ means any … investment contract …” Security Exchange Act of 1934, 15 U.S.C. § 78(c).

[9]See SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946).

[10]See FY 2019 U.S. Securities and Exchange Commission: Hearing Before the Comm. on Appropriations(2018) (statement of Jay Clayton, Chairman, Securities and Exchange Commission).  

[11]See id.

[12]See id.

[13]Id.

[14]See id.

[15]See id.

[16]See Kate Rooney, SEC Chief Says Agency Won’t Change Securities Laws to Cater to Cryptocurrencies, CNBC(June 6, 2018), https://www.cnbc.com/2018/06/06/sec-chairman-clayton-says-agency-wont-change-definition-of-a-security.html.

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