Crypto as a currency: The legislative future of digital currency
By Will Hoey
Cash is king. The colloquial phrase has existed for ages but may not truly represent the ever-changing global economy. However, in 2009, a notorious, anonymous founder successfully created the world’s first cryptocurrency – Bitcoin. Over less than two decades, cryptocurrency has captured the world’s attention with overnight millionaires, the rise and fall of Sam Bankman-Fried, and the creation of a presidential “meme-coin.” This meteoric rise of a seemingly completely new cryptocurrency has challenged the United States' legal framework. The United States needs to modernize its legislation and regulations surrounding cryptocurrency. The country has fallen behind due to inconsistent policies across government agencies and the lack of clear federal laws.
Following the Great Depression, faith in the federal government, the stock market, and the Federal Reserve was at an all-time low, triggering the creation of the Securities and Exchange Commission (SEC) to protect American investors. Little did they know in 1934 that 90 years later, the federal department would take on cases attempting to regulate a completely decentralized currency. The basis for most of the SEC’s investigations into cryptocurrency investors and companies is grounded in a post-World War II SCOTUS ruling in SEC vs W.J. Howey. The court ruled that an investment contract is where an investor (1) “invests his money” (2) “in a common enterprise,” and (3) “is led to expect profits solely from the efforts of the promoter or a third party.” This became known as the Howey Test and centers on many cases against cryptocurrency distributors or platforms. The Howey Test was key in a 2013 SEC and Bitcoin case. Trendon Shavers had used Bitcoin as the currency at the center of his Ponzi scheme. Shavers's main argument was that since Bitcoin was used, not money, his scheme fell outside the SEC's jurisdiction. However, the district court in East Texas did not agree with Shavers and considered Bitcoin a security, clearing the way for the SEC to prowl around the cryptocurrency landscape. The key part of using the Howey Test regarding cryptocurrency has been the courts’ willingness to adapt the Howey test to new technology, specifically the third part of the Howey Test. When the court found that the cryptocurrency in question had been promoted for investors to anticipate a profit, the court mainly ruled in favor of the SEC and deemed the cryptocurrency a security. While some have suggested that cryptocurrency should be seen as neither a commodity nor security, the trend of these cases leads many to believe that when the courts take a definitive stance, cryptocurrency will be seen as a commodity, leading to less regulation from the SEC.
The problem with the SEC pushing cryptocurrency to be viewed as a security is that other government departments do not treat cryptocurrency as a security as well. For example, The Commodity Futures Trading Commission (CFTC), another government agency regulating financial markets, views cryptocurrencies as commodities. In 2018, the CFTC successfully argued to a district court in Massachusetts that “virtual currencies” were commodities and their enforcement action against My Big Coin was within the bounds of their power. While the nature of the CFTC’s investigation into My Big Coin was different from the Ponzi scheme allegations in the Shavers case, both departments had similar arguments for whether cryptocurrency was classified as a security or a commodity. This lack of a firm stance has sent regulators and market makers in the cryptocurrency market to worry about what department has the merit to investigate them. The CFTC is not the only other government body that wants a shot at meddling in the cryptocurrency industry. The Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service (IRS) have all filed cryptocurrency lawsuits. The lack of precise federal regulation has caused these agencies to try to avoid stepping on each other's toes while keeping the US economy stable and safe for a fair investment.
While regulating cryptocurrency through the courts has been the path seemingly most likely over recent years, major players in the cryptocurrency industry, like Coinbase, had practically begged for Congress to provide strict regulation. With the Trump Administration taking office in January, the outlook for cryptocurrency firms looks positive. The SEC has hinted at dropping lawsuits against cryptocurrency firms under the new leadership of Mark Uyeda. Furthermore, as Commissioner of the SEC, Uyeda has promised clarity around cryptocurrency within the coming months. The cryptocurrency exchanges that do not operate within the United States mainly do not due to concerns in regulation and facing hundred million dollar lawsuits. That barrier to entry within the United States market is a pill that only Coinbase has been willing to swallow so far. The lack of a clear line regarding cryptocurrency has deterred major players in the global cryptocurrency scene from conducting business in the United States. Some cryptocurrency exchanges do not allow users to deposit cash from within the United States to protect against potential lawsuits from United States bodies. Even within the last week, OKX, the world’s fourth-largest cryptocurrency exchange, paid $505 million worth of fines and forfeitures. OKX lists its policy as not allowing operation within the US. However, there were ways for US users to circumvent the process and trade on OKX. Besides Coinbase, the two other largest cryptocurrency exchanges – Binance and Bybit – do not function in full within the United States due to the cumbersome amount of sticky red tape in the United States cryptocurrency industry.
The coming months are some of the most pivotal months for the future of cryptocurrency within the US economy. Monetary decisions in the United States have wide ripple effects across the globe. The EU has taken the most definitive action for creating a comprehensive set of regulations for the cryptocurrency market, not classifying cryptocurrency as a security or commodity. Creating a new financial definition for cryptocurrency to fall under, which may be the most comprehensive solution, is feasible. French Hill, a noted cryptocurrency advocate, is the new head of the House of Representatives Financial Services Committee. He is actively pursuing legislation but has not garnered much support from either side. Should the SEC try to take that route, years of further litigation would follow, with cryptocurrency firms claiming such actions are outside of the SEC’s dominion. While cryptocurrency has its fair share of skeptics, cryptocurrency is undoubtedly here to stay. The question for the United States will be, will the federal government adapt to the times and find a fair way to regulate cryptocurrency, or will it be left behind in the cryptocurrency world due to dragging its feet in the mud on regulation?
