cryptocurrency, bitcoin, ethereum, crypto
Is Bitcoin a security?
What counts as a “security” is defined in Section 2(a)(1) of the Securities Act of 1933. That section says:
“The term ‘security’ means any CryptoKitty . . . .”
Just checking you were paying attention.
So it actually says:
"The term ‘security’ means any note, stock, [blah blah blah a bunch of things you’ll never need to know about], investment contract . . . .”
“Investment contract” is the big catch-all in securities laws.
In one of the most famous securities cases, SEC v. W. J. Howey Co., the Supreme Court laid out what is known as the “Howey” test. Basically, something is a security if:
So let's apply this to Bitcoin.
One: Investment of Money?
Yep, you buy Bitcoin with money.
"lol nope, bought mine with Ethereum, HA!"
Doesn't matter, virtual currencies count as an investment. You still invested.
Two: Expectation of Profit?
Sort of, right? You buy Bitcoin hoping to make a profit. But . . . maybe not, because the point of BITC is to use it as a currency, which doesn’t have an expectation of profit. You don't hold dollar bills in your wallet because you think they'll spawn more dollar bills, right?
Three: Common Enterprise?
This is an ugly one. Maybe.
Bitcoin buyers and miners are kind of working together to create this valuable currency and ecosystem, right?
But they’re also not pooling their Bitcoin together into a single company.
All Bitcoin owners are kind of creating this financial ecosystem together, right? In a sense, it is a common enterprise.
But Bitcoin users also don’t pool their Bitcoin into a single place.
The problem is that different courts have defined "common enterprise" different ways. Is it a vertically integrated enterprise? Horizontally integrated enterprise? And so on.
So maybe it is a common enterprise. Maybe not, though. There are several tests courts apply that can all lead to different outcomes; you can read more about them here.
Four: From The Efforts of Others?
This is most likely where Bitcoin is safe. The expectation of profits must be based on some entrepreneurial or managerial efforts of another.
Generally speaking, Bitcoin buyers don’t expect the price to go up because some Elon Musk is at the helm saying “screw it, we’re going to Mars.”
Some argue that the expectation of profit from Bitcoin comes from the effort of exchanges or developers working on new forks. But the expectation of profit seems to come from a belief that a new finance system is being created.
The Fifth Factor: Reality
There's a fifth factor to the Howey test no one talks about: practical reality.
If Bitcoin is a security, who would the SEC go after?
Like we've written before, with Bitcoin, there is no there there.
It's hard to make an entity register its securities with the SEC when there's, ummm, no one there.
Given the "fifth factor," it makes sense that the SEC's main course of action against crypto is fraud claims. The SEC has pretty broad jurisdiction under various rules to pursue fraudulent, deceptive and manipulative practices. So you can expect most SEC actions will be based on fraud, not claims of illegal offers and sales of securities.
This is a pretty good deep dive on the meaning of “security” and whether Bitcoin is one.