Bitcoin and securities: The law is coming
Is everything in the blockchain space a security? Does Bitcoin Only Pass the Howie Test? How do we determine the difference between a security and a commodity?
Background story
Libertarian activism is one of the main things that got me into Bitcoin in 2012. I firmly believe that individual sovereignty in person and property should be the cornerstone of everything; and that any relationship that does not start with consent can ultimately be argued to be immoral. This puts me in a position of general concern towards regulatory institutions. To be 100% unequivocally clear, it is my personal opinion that Americans are grossly overregulated by bureaucracies and that it should be our goal, as individuals and as a people, to reduce the size and scope of government as consistently as possible until further notice .
For what it’s worth, the Securities and Exchange Commission (SEC) is not a regulatory agency. It is an oversight agency, and the specificity of terminology is an indicator that we already have too many types of agencies involved in the economic process. So how do we reduce the perceived need for the SEC so that the average voter sees them as extemporaneous, redundant, obsolete, and in need of resolution?
Well, the first step would be to individually and collectively stand against fraudulent investment activity, because every time someone succeeds in giving money out of a group of people, the SEC gains more power because the average person becomes more and more likely to say “why isn’t it being Nothing done about this?”
So freedom begins with personal responsibility which leads to a culture of responsibility.
Have we seen this in the blockchain space? No, not a long mile. Instead, we see a culture of cyberbullying, cultism, boiler room pumping and landfills, and endless armies of social engineering robots designed to simulate demand.
So, what is a security?
Securities are negotiable financial instruments that represent an ownership position in a listed company (shares), a creditor relationship with a government body or company (bonds), or rights to ownership as represented by an option. Securities usually involve more complex legal documents than commodities do, and the values of securities change depending on market conditions.
The standard by which a security is determined is “The Howey Test.” A financial transaction qualifies as a security if it involves the following four elements:
- An investment of money
- In a joint enterprise
- A reasonable expectation of profit
- Derived from the efforts of others
Seems pretty obvious, except the test is about half a century old, and a lot of interesting financial instruments have been invented in the meantime.
“Crypto” companies want to avoid having their tokens categorized as securities because that would open them up to further regulatory scrutiny and demands. Since securities are highly regulated and must comply with a number of laws that could potentially limit a company’s ability to operate, launching a security token will necessarily increase disclosure requirements, limits on who can buy or sell the token, and restrictions on how it can be used in the economy. By avoiding (or trying to avoid) the security classification, crypto-companies maintain a much higher degree of freedom in terms of their operations – which is crucial since the overwhelming majority of them were only trying to raise funds on hype and launder their profits through offshore exchanges in the first place .
As such, founders and exchanges in the crypto-economy seek to issue assets as “money” or “commodities.”
What is the difference?
Commodities are usually physical goods or raw materials that can be bought and sold and have an intrinsic value due to their utility in the economy regardless of price. Classic examples of commodities include precious metals, oil, wheat and livestock. The members of the SEC seem to agree that bitcoin is a commodity, and there have been some hints of things like Ethereum in the past, although no official position has been taken by the SEC at an agency level (yet). Remember that there is a difference between the opinions of Hinman or Gensler and the official position of the SEC. Furthermore, it is up to the courts to determine whether the SEC’s opinion is an accurate interpretation of the law.
So if Bitcoin is a commodity, just like gold or oil, this should indicate that it is immutable, immutable, immutable, and that its value is derived from its inherent properties. And that is!
Well maybe…
There is a huge legal issue surrounding the claim that BTC is “bitcoin in name only.” It’s an unpopular idea among the laser cult of small blockers, but it’s a very real argument that BTC developers form a common enterprise, the culture has a high expectation of profit, and that the investment of money creates value derived from the efforts of others.
BTC advocates claim they are an emerging collective, but many claim they are coordinated.
We made the right call in ejection @gavinandresen from Bitcoin.
It doesn’t matter what NDAs or other agreements he may have signed with Craig Wright. To continue to abandon this is to be complicit in fraud. The ethical thing to do is to undo it and accept the consequences.
— Peter Todd/mempoolfullrbf=1 (@peterktodd) 4 February 2023
- Who is “we”, Peter?
- How did the individuals of “we” get the authority to “kick out” the lead developer?
I think it is most likely that the BTC Core developers are a general partnership with unlimited liability similar to a hobby business that passed the value threshold and de facto becomes a real business and as such such developers have de facto fiduciary liability and whatever penalties may be assessed to create conditions for soft-forked derivatives of BTC to be dropped from the air whenever someone sends to a Segwit, Bech32, Native Segwit, P2SH or Taproot address…
Either that, or they run a joint stock company. The worst option would be for courts to see the BTC Core developers as a Racketeer influenced and corrupt organization.
On top of the bizarre partnership that exists between the Core developers and the rest of the network, there is also the fact that BTC’s primary use for the past decade and a half has primarily been to be bought, sold, and exchanged as a financial instrument, and the use of which cash has a long history of mostly occurring as a vehicle for avoiding taxes or in the business of illicit trade in illicit goods.
The SEC may determine that since no other commodity in history has been used more as an investment in itself rather than as a tool to drive other economic activity, BTC may constitute an extended application of the Howey test. Consequently, the same rules and regulations for trading securities can be applied to all digital currencies – including BTC. Because of this potential categorization, those trading BTC may be subject to the same market manipulation laws as those trading more traditional commodities such as gold or oil, but also for trading an asset with unclear fundamentals, potentially constituting a type of fraud.
If you’re still on the fence, ask this: what item has a roadmap or a BIP system or the ability to soft fork?
None I’ve ever heard of. Can gold be changed? Would it be valuable if it changed every year or two based on someone else’s whim? No.
Final thoughts
Since 2016, I have warned people that it is extremely important to use Bitcoin as cash because failure to use the tool in the real economy will open it up to greater regulatory scrutiny. This still stands, and it is as important as ever to be sure that the protocol is set in stone, predictable over time and used as raw materials are used in the real economy.
For this reason, I believe it is very wise for BSV to continue to get ahead of the regulatory and legal storm coming for all digital currencies by hardening it against absolute protocol ossification. We also need extreme clarity on the difference between software and protocol and the importance of a clearly written protocol specification and legal opinion on network and database management in a distributed cash system.
On these topics, ideas solidify as they harden in the courts, and whether we like it or not, the law is coming.
See: The history of money and the future of Bitcoin
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