Four Regulatory Perspectives of Cryptocurrency

From our standpoint, there are four critical regulatory perspectives of cryptocurrency to consider. Interestingly, the differing views directly correspond with various regulatory agencies and government institutions that are undoubtedly putting together their own “policies” for supervision and controls. It remains to be seen which perspective emerges as the industry standard for investment advisers.

Perspective One – Crypto as a Commodity

One popular view is to treat cryptocurrency as a commodity. Former Commodity Futures Trading Commission (CFTC) Chairman Dr. Heath Tarbert was adamant that cryptocurrency should fall under the jurisdiction of the CFTC. The CFTC first stated that it viewed bitcoin and other virtual currencies as commodities back in 2015. In a more recent 2019 interview, former Chairman Tarbert said, “It stands to reason that similar assets should be treated similarly. If the underlying asset, the original digital asset, hasn’t been determined to be a security and is, therefore, a commodity, most likely the forked asset will be the same, unless the fork itself raises some securities law issues under that classic Howey Test.”

The Howey Test? What’s that?

Perspective Two – Crypto as a Security

I’ll spare the details of the definition of a “security” as provided by the Securities Act of 1933 (break out those Series 7 study materials), but take my word for it when I tell you that the definition did not include cryptocurrency.  However, one essential tool that we have for the evaluation of crypto as potential security is the Howey test.

Once upon a time, around 1946, a citrus farm in Florida was owned by a company named Howey Company. The company wanted to sell its land to a group of investors who did not know how to cultivate it to make it profitable. By purchasing the land, the investors relied on the knowledge and skills of a “third party” to recognize a profit. Since the purchasers of the land invested with the expectation that profits would be generated solely through the work and efforts of a third party, the Supreme Court ruled that this activity fell within the definition of an investment contract and cited the Howey Company for failure to register before entering into the transaction.

As advisers consider the many implications of implementing cryptocurrency into their practices, the SEC will likely continue to wrestle with whether or not there are sufficient parallels between the cryptocurrency environment and the original Howey Company Supreme Court case to justify the classification of crypto as a security. Are crypto investors/purchasers operating in a speculative space to derive profits solely from a third party’s work and efforts?

Perspective Three – Crypto as a Digital Asset

The IRS has indicated that virtual currency doesn’t have status as legal tender in any jurisdiction. Further, the IRS writes that virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency is referred to as “convertible” virtual currency by nature of the fact that it can be exchanged into another currency, either real or virtual, and it can be digitally traded. The IRS is currently treating virtual currency and digital assets like property, not as securities. The IRS has published a comprehensive FAQ for tax guidance on digital assets.

Perspective Four – Crypto as a Digital Currency

FinCEN (Financial Crimes Enforcement Network) is a bureau of the US Department of the Treasury that collects and analyses information about financial transactions to combat money laundering and other financial crimes. According to FinCEN, cryptocurrency has been defined as a medium of exchange that is not recognized as a national currency in any jurisdiction. Ultimately, this opinion’s appearance provides maximum flexibility to exercise a “case-by-case” strategy for oversight. On the one hand, classifying crypto as a digital currency may reinforce the idea that the bureau maintains the jurisdiction to leverage enforcement action should funding terrorist activities occur using crypto. On the other hand, by implying that crypto is “not money,” FinCEN relieves itself of the emergency (and likely very costly) responsibility to figure out how to track individual transactions as if they were wire transfers or other more traditional currency transactions.

Exciting times ahead. We’ll see which, if any, view emerges as the industry standard.

These materials have not been reviewed or approved by any regulatory agency, and represent solely the interpretative opinions of Synergy Compliance Education (“Synergy”). To the fullest extent permissible pursuant to applicable laws, Synergy disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. In no event shall Synergy have any liability for damages, losses, and causes of action for accessing these materials.