Bill in the US qualifies bitcoin as a commodity

In the United States, senators Cynthia Lummis (Republican) and Kirsten Gillibrand (Democrat) introduced a bill to regulate bitcoin last Tuesday. The bill includes a framework for federal oversight of bitcoin and crypto, among other things. The proposal should also clarify the legal qualification of bitcoin. For example, bitcoin would not be qualified as a security (effect), but as a commodity.

The ???? ??Responsible Financial Innovation Act??????? bill aims to integrate digital assets into existing regulations. In addition to supervision and the legal qualification of digital assets, the proposal also covers consumer protection, taxation, mining and regulation of stablecoins . In short, it must provide clarity for the sector, regulators and other market parties, in a way that does not hinder the innovative character of the sector.

An important part of the bill is that it creates clarity in the legal qualification of bitcoin and digital assets. Bitcoin is qualified in the bill as a commodity (think of bulk goods, such as grain and commodities) and most cryptos as a security. Most cryptos will therefore be placed in the same box as stocks, bonds and other securities.

This not only means that other laws will apply, but also other regulators will come into play. For bitcoin’s spot markets, the Commodity Futures Trading Commission (CFTC) will have to become the designated regulator. At the moment that is still the Securities and Exchange Commission (SEC).

Howey test

But how is it determined whether a digital asset is a commodity or security? In other words: how exactly does the legal qualification work?

The definition of a security (security) can be found in the ancient Securities Act. The definition of ‘security’ contains a summary of (financial) instruments, such as shares and bonds. Bitcoin and cryptos are logically not listed here. The law dates back to 1933.

What now? Case law provides a material criterion for qualifying an instrument as security. The catch-all concept of ??????investment contract??????? offers the possibility of designating instruments ?????ǣ that are not included in the summary of the security definition ?????ǣ as security. The criteria of the term ??????investment contract??????? stem from the so-called Howey test.

The Howey test defines an investment contract as:

a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits from the efforts of the promoter or a third party.

So an investment contract is a:

  1. investment of money;
  2. in an enterprise (common enterprise);
  3. with a profit expectation;
  4. derive from the effort of any party other than the buyer.

Due to the flexibility of the Howey test, various constructions that are devised to collect money in exchange for a profit promise (to the moon) can qualify as security.

The possible consequences

It is not inconceivable that most cryptos actually belong to the ‘securities’ category. Gary Gensler, chairman of the SEC, already hinted at this a few months ago. This would mean that cryptos that qualify as security ?????ǣ under the bill ?????ǣ will come under the usually stricter supervision of the SEC. fall.

Furthermore, the transparency that the bill requires from exchanges is probably not good news for all kinds of crypto projects. Crypto projects that pay exchanges for listing their coins, have given part of the (pre-mined) coins to founders, influencers or others or pay market makers for creating supply and demand will have to disclose this. Things that actually cannot bear the light of day will thus come to light.

If the bill passes, it is likely to be beneficial for bitcoin. After all, a clear (legal) distinction is made between bitcoin (commodity) and cryptos (securities). It may be a confirmation for the market that bitcoin is fundamentally different from all other cryptos. According to the bill, bitcoin transactions up to $ 200 will not result in a ‘taxable event’ and that will probably also benefit the adoption of bitcoin.

Although there is a small chance that the bill will actually be adopted in this form, it is a strong first step. The American approach again seems to bear witness to a different approach than that of the European Union. In Europe, the emphasis is more on potential risks than on innovation and opportunities.

Want to know more about the bill? Then listen to the Crypto Update of the Cryptocast.

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