Yes, Bitcoin will be Regulated by the SEC. Here’s why:
Everyone is talking about Bitcoin, speculating (no pun intended) as to whether it will be regulated by the Securities and Exchange Commission (“SEC”), among other regulatory authorities. Yet, whether the SEC is able and willing to impose regulations thereon turns on one question:
Is Bitcoin a “security”?
Put simply, if Bitcoin is deemed a “security” than it falls under the purview of the SEC pursuant to the Securities Act of 1933 and Securities and Exchange Act of 1934, and is subject to the same regulations as other “securities,” like Apple or Amazon stock, for example.
Although the ’33 Act provides certain specific definitions of securities (stocks, bonds, notes, etc.), it also includes a catch-all phrase: “investment contracts.” Notably, the SEC still uses a test that was established in the 1946 decision of SEC v. W. J. Howey Co., 328 U.S. 293 (1946) (“Howey”) to determine whether something qualifies as an “investment contract” and thus a “security.”
Being that Bitcoin clearly does not fall under one of the specified definitions, the question is whether Bitcoin falls under the “investment contract” catch-all.
SCOTUS has articulated an “investment contract” to be any transaction in which a person invests money in a common enterprise and is led to expect profits from the efforts of others. It is important to note that the SEC also looks at the “economic realities” of a transaction. In other words, if it looks like a duck, quacks like a duck and waddles like a duck…it’s a duck. Similarly, if it looks like security and acts like a security then it is a security. The act of merely calling Bitcoin a cryptocurrency instead of a cryptostock, for example, is insufficient to obviate it from regulation.
So, is Bitcoin an “investment contract” and thus a “security”?
Let’s find out.
Note: I refer to Bitcoin purchasers as “Users” because the the term “investor” is a term of art for purposes of Securities Regulation.
First, do Users invest money when buying Bitcoin? Yes. Most purchases of Bitcoin are either done through fiat money, such as the U.S. dollar, or other virtual currency. Traditionally people have taken fiat money and used it to purchase Bitcoin, which is then use to buy other virtual currencies (like Etherium or Litecoin, for example). Consequently, Bitcoin begins to look like a Security under the first prong of Howey.
Second, is the investment in a common enterprise? It appears so. The Bitcoin community contains tens of millions of Users who all have interrelated interests in a common scheme. Namely, that Bitcoin’s value appreciates. Moreover, this appreciation interest is also consistent with the Managers of Bitcoin. The question of who qualifies as a “Manager” is a question for the ages since the purpose of Bitcoin is decentralization. However, if anyone does qualify as managers it would be the Bitcoin miners and its core developers. Arguably, however, even those who own Bitcoin (even a small percentage of one) may be considered a Manager. As an aside, another mutual interest does exist: strengthening the underlying community of Bitcoin. Thus, given the interrelated interests between Users (horizontal commonality) and the interrelated interest between Users and the Managers (vertical commonality), Bitcoin starts to look even more like a “security” under the second prong of Howey.
Third, is expectation of profits the principal motivation for Users? Presumably so — at least for some. There are two classes of Bitcoin Users I have come into contact with: (1) those buying Bitcoin as an investment in the hopes that the price will appreciate and they will make some serious cash; and/or (2) those that believe in the underlying Blockchain technology and are investing to move that technology forward. Most Users probably fall under both classes, i.e. Users who want to make money and simultaneously believe this technology is the future. Ultimately, under the third prong of Howey, the question is going to turn on whether expected return is the principal motivation for the investment. I think there’s enough to support the contention that the majority of Bitcoin Users, especially as it becomes more mainstream, are looking at it as in investment, similar to their investments with [insert any Broker-Dealer]. Thus, Bitcoin likely satisfies the third prong of Howey.
Finally, pursuant to the fourth prong of Howey, any profits derived from Bitcoin must be derived primarily form the efforts of others. Essentially, the efforts of the Managers must be predominant and the Users’ efforts must be mostly passive. I could spend countless hours delving into this prong of Howey. However let’s be practical, and practically speaking when a user buys Bitcoin they press a button to Buy and that is the extent of their efforts. It is up to the exchanges to execute the order, the Bitcoin miners to record the transactions, and the ongoing efforts of the core developers to improve the code and make sure everything is running up to par. As a result, Bitcoin likely satisfies the fourth prong of Howey.
Ultimately, Bitcoin looks like a duck to me. What do you think?
PLEASE NOTE: **All statements, shares and posts by me online reflect only my personal views and are not intended to be, and they do not constitute, legal advice or investment advice.**