SEC’s Digital Asset Framework and Crypto Prices Push Upward
April 9, 2019 Weekly Crypto Round Up
Howey Wowie
The Securities and Exchange Commission’s Director of Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation released a statement on Wednesday outlining new guidelines to help cryptocurrency enthusiasts comply with US federal securities laws. The Framework for ‘Investment Contract’ Analysis of Digital Assets identifies some of the factors used by the SEC in determining whether or not a digital asset is considered a security. Its target audience includes those launching ICOs or otherwise selling digital assets and should therefore help clarify if those projects should register with the SEC.
To do so, the framework applies the Howey Test to digital assets. First, it looks to decide if there was the investment of money in a digital asset. For example, was the asset purchased with fiat currency, another digital asset, or some other type of money?
Then, it establishes the idea that with most digital assets, a “common enterprise” exists. In other words, the fortune of a digital asset purchaser is linked to the fortune of other purchasers (horizontal approach) or the promoter (vertical approach). This can be demonstrated in many ways and is evident in the pooling of assets and distribution of profit or correlation of an investor’s success with the promoter’s success.
The framework also addresses the third prong of the Howey Test. Do digital asset holders reasonably expect profits derived from the efforts of others? Purchasers may anticipate future dividends or even just price appreciation before selling on a secondary market. In this segment of the test, the SEC stresses the importance of relying on another party to develop, improve, and maintain the network and whether or not the digital asset grants the holder any rights to shared profits.
The agency makes it clear that the framework is not a rule nor is it binding, but it nonetheless sheds light on their thinking. Improved legal certainty should be welcomed and seen as a stepping stone to further adoption.
Gains World
On Tuesday, the price of Bitcoin — along with the prices of most other cryptocurrencies — surged 20% in just minutes. At first, many pointed to an April Fool’s prank claiming the SEC approved two new Bitcoin ETFs. According to their logic, the price spike was merely an overreaction to fake news, perhaps even by duped trading bots.
However, details soon emerged regarding several major purchases placed at the same time. In total, approximately 20,000 bitcoin were purchased worth about $100 million US dollars. The orders were spread out across three exchanges, and the trading pattern hints at a single buyer using algorithmically-managed trades.
Still unconvinced, others believe the spike in price is in anticipation of the next reward halving. Expected to occur in May 2020, the change will reduce the amount of bitcoin paid to miners and therefore restrict the supply. It seems difficult to believe a well-known event would cause such a severe swing in price, but historical evidence tends to support a run on the price at least a year in advance. While we may never know the exact cause of Tuesday’s gains, one thing is for certain: if there really was a single whale leading the price surge, that individual is looking to stay anonymous.
The Other News We’re Following
- The United Arab Emirates’ new blockchain strategy aims to shift 50% of all government transactions to the blockchain by 2021
- Crypto exchange Liquid announced its latest capital raise values the company at more than $1 billion
- PayPal joins Series A round backing Cambridge Blockchain, a startup hoping to give users the ability to own their online identities
270thousand transactions per second will become possible on the Ethereum blockchain via layer 2 rollup scaling
“Paper money is going away… crypto is a far better way to transfer value than pieces of paper, that’s for sure.”
— Elon Musk
