What do regulators mean when they say Bitcoin is a non-security token?
Gary Gensler is famous in the crypto community by virtue of his position as the head of the Securities and Exchange Commission in the US, a regulator that has a lot of say in what the future may hold for crypto, in the US and abroad.
Gensler has in the past mentioned a few times that Bitcoin may be viewed as a non-security in future regulation, leading to whooping and cheers from most corners of the crypto world.
There’s a global push by regulators to create a regulatory environment in which the crypto industry can develop responsibly in a way that is safe for investors and allows them to benefit from what it has to offer. However, it has been tricky for regulators to define these new types of crypto investments using benchmarks that have, up until now, only applied to traditional finance.
To regulate any investment, the regulators first have to see which regulation best applies. If seen as a security, the investment, let’s say cryptocurrency in this case, would be overseen by the Securities and Exchange Commission (SEC) and would be regulated in the same way as company shares or bonds. These types of financial instruments are used by companies to raise money, and, in return, it gives investors the chance to own a stake in the company, or receive a monthly dividend payout if they own bonds.
The Howie test is used by US regulators to check whether an investment classifies as a security.
What’s the big deal?
If companies use their coins to raise money, which is known in traditional finance as a public offering, they first have to register with the SEC and follow a specific set of securities regulations. If the SEC were to find that coins that are purportedly intended to be used by people are actually securities, it could lead to legal action by the SEC.
If Bitcoin isn’t a security, then what is it?
The SEC would classify Bitcoin a commodity, in the same category as energy and metals, which would fall under the supervision of the Commodity Futures Trading Commission.
The Crypto Bill, tabled by US Senators Cynthia Lummis and Kirsten Gillibrand, attempts to make sense of this grey area by proposing that a concession be made for digital assets that are not fully decentralised, like a token issued by a company with a CEO at the helm. The senators recommend that these tokens, and so the company issuing them, be exempt from classification as a security, as long as it files disclosures with the SEC twice a year.
Why the crypto community is excited for Bitcoin to be classified as a commodity
Bitcoin proponents argue that in saying Bitcoin is not a security, Gensler is reinforcing Bitcoin’s torchbearer role as the viable alternative to traditional currencies, while also hinting at Bitcoin being one of the true decentralised cryptocurrencies.