The 1940s legal test that could pave the way for crypto regulation

The 1940s legal test that could pave the way for crypto regulation

Binance USD (BUSD) is a stablecoin issued by New York-based Paxos Trust Company and is backed 1:1 by the US dollar. However, recent regulatory scrutiny by the US Securities and Exchange Commission (SEC) has raised questions about whether BUSD should be considered a security.

There are arguments for and against this, which I’ll dive into in this article. Most interestingly, the Howey Test and legislation from the 1940s could have a key role to play in this most modern of financial disputes.

Security or not security

To begin, it is important to understand what a security is. According to the SEC, a security is any investment contract, note, stock, or instrument that represents an ownership interest in a company, partnership, or investment pool, or that is offered as a means of raising capital.

In the case of BUSD, the SEC issued a notice to Paxos stating that the stablecoin should have been registered as a security.

The regulator argued that BUSD meets the definition of a security because it is offered as a means of raising capital, has the potential for profit or loss, and derives its value from the success of a third party, namely Binance.

However, Paxos has disputed this classification. The company has even threatened litigation.

There are several arguments for why BUSD is not a security. First, BUSD is a stablecoin, which means that its value is pegged to the US dollar.

This pegging makes it less likely to experience the volatility associated with other cryptocurrencies. As a result, BUSD may not meet the definition of an investment contract because it does not have the potential for significant price fluctuations.

Second, BUSD is not an investment in a company or partnership, but it’s a digital asset that represents a claim on a reserve of US dollars held by Paxos. This means that BUSD does not represent an ownership interest in any entity and is not used to raise capital.

Third, BUSD is used primarily as a means of payment and is not marketed as an investment. Unlike securities, which are marketed to investors expecting a profit, BUSD is promoted as a stablecoin used for transactions.

On the other side of the coin (pun intended), there are arguments for security classification.

To start, BUSD is backed by Paxos, which is a regulated financial institution. This means that investors may view the stablecoin as a safe investment, similar to a money market fund or certificate of deposit.

Next, the fact that BUSD derives its value from the success of Binance may be enough to classify it as a security. Investors may be purchasing the asset with the expectation of profit.

Lastly, the fact that BUSD is used primarily as a means of payment does not necessarily stop it from being a security. The SEC has previously classified cryptocurrencies like Bitcoin and Ethereum as commodities, despite their use as a means of payment.

The Howey Test for cryptocurrencies

The Howey Test is a legal standard used to determine whether a financial instrument is a security. There is debate over whether the almost 100-year-old test can be applied to digital assets, so some experts have proposed a modern-day version tailored to cryptocurrencies.

This version would include looking at several factors.

The first – as with the original test – is whether there is an investment of money. However, if a digital asset issuer has not sold any assets to build its project, it is unlikely to be considered a security.

The second factor is whether there is an expectation of profits from the investment. If a digital asset is utility-based and is used for purposes other than investment, such as voting, it is unlikely to be considered a security.

The third factor is whether the investment of money is in a common enterprise. If the project is decentralized and not controlled and operated by a centralized entity, it is unlikely to be considered a security.

The fourth is whether any profit comes from the efforts of a promoter or third party. If the profit primarily comes from the community, which has nothing to do with the issuance of the digital asset, it is unlikely to be considered a security.

Improving the Howey Test

One approach to adapting the Howey Test to fit cryptocurrencies better is to examine the underlying tech of the digital asset being scrutinized. This would involve evaluating whether the cryptocurrency is sufficiently decentralized and functional to qualify as a utility token rather than a security.

If a token is used mainly to access a blockchain network or platform, and its value is tied to its use rather than speculation, it may not fit as a security.

The SEC has also brought cases against companies that issue cryptocurrencies but do not meet the requirements of the Howey Test. This suggests to me that the SEC is trying to apply the standard to cryptocurrencies even though it may not be completely apt.

While there are some potential ways to improve the test’s application, the ongoing debate highlights the need for greater clarity and guidance from regulators regarding the treatment of cryptocurrencies.

Seeking clarity

While the Howey Test can serve as a starting point for regulation, it is essential to adapt and refine the rules to better reflect the realities of the cryptocurrency market.

A more nuanced and flexible approach is required to ensure innovation while protecting investors from fraud, and more fleshed out regulatory guidance can establish clarity in the market. To do this, authorities should work collaboratively with industry players.

To end where we started, it’s important to note that BUSD should not be classified as a security. Its main purpose is to serve as a payment method rather than an investment tool, and it’s not structured to produce returns for investors in the same manner as conventional securities.

BUSD’s value – with its link to the US dollar’s value – is meant to remain steady instead of being influenced by the speculative pressures that frequently hit other cryptocurrencies. So, let’s keep it this way.

 

Source: https://www.techinasia.com/1940s-legal-test-crypto-regulation

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Apples and oranges? How the Ethereum Merge could affect Bitcoin (With additional commnets)

Apples and oranges? How the Ethereum Merge could affect Bitcoin (With additional commnets)

Additional comments by Anndy Lian on top of what CoinTelegraph has mentioned.

The Merge is the right direction for cleaner crypto mining. The more direct impact I see after the transition is that bitcoin becomes the biggest target for green activists. There were more reports about bitcoin’s energy usage and mostly negative.

And because of the switch, many experts also said miners would forgo POW mining, but I say otherwise. I see the ETH POW Forks projects are working hard. The miner communities are now more united now than ever. For example, Bitmain also brought down the prices of their Antminers to help the miners get back into profits. These various factors helped the miners offset their operating costs in this bear market, keeping them alive.

Additionally, a good point to highlight is bitcoin’s hash rate. The hash rate continues to surge, recording new all-time high daily. The chip shortage has turned around, and the price of GPU is now at a more reasonable value. Taking GeForce RTX 3090 Ti, for example, the MSRP is $2,000, and it came down to $1,030 in September. These are positive signs for bitcoin.

As I have said before the transition, the impact of The Merge will not have too much boost for the crypto industry in the short run. What Vitalik has planned for Ethereum is a long-term vision. As for bitcoin, it is another kind of animal; it is the big brother. If bitcoin drops, the impact on every other cryptocurrency is inevitable.

 

Apples and oranges? How the Ethereum Merge could affect Bitcoin

While the Ethereum Merge failed to move Bitcoin from a price standpoint, the industry believes we have yet to see the effects of its shift from PoW to PoS.

It’s been a month since Ethereum said goodbye to an essential feature its blockchain shared with Bitcoin. Called the Ethereum Merge, the long-hyped upgrade was widely celebrated, with the blockchain ecosystem. However, for the mainstream audience or even for the average trader, it felt more like a Star Wars Day celebrated by sci-fi geeks than an early Christmas.

As the Ethereum Merge occurred on Sept. 15, the most extensive blockchain ecosystem parted ways with the proof-of-work (PoW), the energy-hungry consensus mechanism that makes Bitcoin tick. The Ethereum blockchain now works on a more eco-friendly proof-of-stake (PoS) mechanism that doesn’t require any mining activities, leaving thousands of miners worldwide scratching their heads.

Price-wise, Bitcoin is yet to take a hit from the fundamental shift of its closest competitor. A whole month has passed since the Ethereum Merge, and the BTC price is still stuck between $18,000 and $20,000.

However, the overarching mainstream narrative of “Bitcoin should contribute to the world, not destroy it by depleting energy resources” is rekindled with Ethereum’s significant switch to a system that keeps blockchain alive with minimal resource consumption.

Ethereum avoided a dead end

Cointelegraph reached out to industry insiders to get a clearer picture of the Ethereum Merge’s impact on Bitcoin.

“PoW was a dead end for Ethereum,” says Tansel Kaya, a lecturer at Kadir Has University and the CEO of blockchain developer Mindstone, “Because an Ethereum network that doesn’t scale can not live up to its promise.”

However, the Bitcoin community is not happy with the way its biggest price competitor took, according to Kaya. The BTC community often criticizes PoS for being vulnerable to censorship, he remarked, adding:

“If what [Bitcoin maximalists] say is true, Ethereum will either turn into a docile fintech network that is censored by governments, or a centralized structure like EOS, controlled by wealthy investors.”

Speaking to Cointelegraph, Gregory Rogers, CEO and founder of crypto-based gifting platform Graceful.io, noted that the Merge solidified the two distinct blockchains’ positions in the market. “Ethereum remains the transaction chain of choice with its increased speed and reduced fees,” Rogers said, adding, “Bitcoin is now the store of value of choice. They were already headed in this direction, but the Merge simply clarifies it.”

From a price point, though, multichain marketplace UnicusOne founder and CEO Tashish Raisinghani believes that Bitcoin price will take a hit. “The crypto industry had a hard time because of macro-level challenges which resulted in the current bear market,” he said, adding that the Merge would make Ethereum more sustainable compared to Bitcoin, “Which hasn’t yet been able to recover from the Chinese mining crackdown in 2021.”

PoW is unrivaled in network security

Addressing the energy side of the argument, John Belizaire, CEO of eco-focused data center company Soluna Computing, told Cointelegraph that even though Ethereum’s switch to PoS could save energy, “It will also undermine the core decentralization aspect of cryptocurrency.”

Although Bitcoin’s PoW consensus mechanism is energy-intensive, it is also fundamental to the blockchain and “is the best choice for any cryptocurrency that prioritizes network security.”

Co-locating flexible crypto mining centers with renewable energy plants can help stabilize the electric grid, solve renewables’ wasted energy issue, and provide an abundant source of cheap energy to crypto miners, Belizaire added.

The Merge united crypto miners

Bitmain also brought down the prices of Antminers, its flagship crypto mining units, to help miners get back into profits, he added:

Despite the Merge, Ether miners won’t simply forgo PoW mining just because Ethereum Classic is not minted via mining anymore, according to Anndy Lian, author of the book NFT: From Zero to Hero. Lian told Cointelegraph that the EthereumPoW (ETHW) project — the result of a hard fork after the Merge — is working hard and the miner community is more united than ever.

“These various factors helped the miners offset their operating costs in this bear market, keeping them alive.”

Joseph Bradley, the head of business development for Web3 service provider Heirloom, likened Bitcoin to “a global risk asset that is correlated to TradFi markets.” Bradley told Cointelegraph that, although Ether may be traded similarly, it still has neither the market depth nor the size that Bitcoin has. “Do we expect the world to become more or less chaotic in the coming years?” he asks rhetorically, answering:

“Most people would lean towards more chaotic. Security will matter during this time. Bitcoin will become even more important. Expensive energy will create innovation with miners — They will most likely move toward positioning Bitcoin mining as an extension of the electrical grid itself.”

Bitcoin and Ethereum: “Apples and oranges”

Not everyone agrees that the Ethereum Merge will have an impact on Bitcoin, though. Martin Hiesboeck, head of research at crypto exchange Uphold, dismissed a direct comparison between Ethereum and Bitcoin as “apples and oranges.”

Hiesboeck told Cointelegraph that Ethereum is basically a “company controlled by venture capitalists,” that’s why the transition to proof-of-stake aims to improve its economic and environmental credentials:

“Bitcoin doesn’t need to do that. Bitcoin is not a brand. Bitcoin is a computer network. Its output represents money. Nobody owns it. There is no brand. No CEO.”

Khaleelulla Baig, the founder and CEO of crypto investment platform Koinbasket, supported Hiesboeck’s argument, telling Cointelegraph that the Merge won’t have any meaningful impact on Bitcoin as these assets serve different purposes.

Bitcoin’s purpose is “to prove itself as a superior store of value to fiat currencies,” according to Baig. The PoW mechanism goes well with the purpose of Bitcoin, “As it helps the network maintain the scarcity of 21 million BTC via its difficulty adjustment rate,” he added.

Bitcoin as a PoW and Ethereum as a PoS network are making significant contributions to the crypto-asset ecosystem by competing with their best features. Tansel Kaya summarizes: “Having two distinct approaches rather than one is more suitable for the spirit of decentralization.”

 

Source: https://cointelegraph.com/news/apples-and-oranges-how-the-ethereum-merge-could-affect-bitcoin

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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Anndy Lian: “Bitcoin ETF could attract more than $400 million in investment accordingly to Bloomberg. This could triple the amount. I am optimistic.”

Anndy Lian: “Bitcoin ETF could attract more than $400 million in investment accordingly to Bloomberg. This could triple the amount. I am optimistic.”

How Did Investors React To bitcoin’s ATH?

Bitcoin’s recent price surge ensured the cryptocurrency reached an all-time high, breaking beyond the $66,000 barrier for the first time, retaining its position as the world’s most valuable cryptocurrency. The market cap of all cryptocurrencies surpassed $2.53 trillion in May this year, reaching an all-time high of $2.64 trillion because of the latest Bitcoin price spike.

 

Bitcoin’s surge is the number one topic being discussed in our social media and Telegram groups at the moment. Many investors are astonished as to why Bitcoin’s price has risen so dramatically. Let’s look at what this implies for investors as I examine the reasons why the Bitcoin price hit an all-time high this time.

What’s causing Bitcoin’s price to rise?

The launch of the first Bitcoin exchange-traded fund (ProShares Bitcoin Strategy ETF, trading under the ‘BITO’ ticker on Wall Street) on the New York Stock Exchange, is the key driving force behind this Bitcoin price spike. Many crypto sector investors around the world have been advocating the advantages of crypto ETFs for years, most notably Cameron and Tyler Winklevoss, famous for their involvement in Facebook who had their Bitcoin ETF turned down by the Securities and Exchange Commission (SEC) in 2017. The success of this Bitcoin ETF has in turn set a precedent for other cryptocurrency ETFs to pass the audit, and it is also the primary driver for the recent rise in cryptocurrency values. The ProShares ETF witnessed

 

“one of the biggest first days on record for ETFs, raking in $550 million from crypto-hungry investors. Overall, more than $1.01 billion of shares changed hands,”

 

according to a report on business news channel CNBC.

 

Bitcoin Exchange Traded Funds (Bitcoin ETFs) are actually Bitcoin ‘futures’, not direct investments in Bitcoin. Futures are a kind of financial derivatives, which are essentially an agreement to buy and sell assets at a future date, meaning the assets are not owned by the investors. The fund’s main feature is that it allows non-crypto investors to buy Bitcoin without having to register a separate cryptocurrency trading account.

 

ProShares CEO Michael L. Sapir confirmed:

 

“BITO will open up exposure to bitcoin to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider and creating a bitcoin wallet.”

 

Simply put Bitcoin ETFs are not the same as buying Bitcoin directly.

 

“The futures-linked fund is subject to rollover risk, meaning that when it periodically closes positions in the futures contracts it holds, it can find itself, as is the case now, repurchasing new batches of future-dated contracts for more money. The situation, known as “contango,” eats into profits,”

 

confirmed the report in Fortune.

 

So, if you’re thinking about buying Bitcoin ETFs, make sure you know everything there is to know about futures trading.

What does the Bitcoin price surge mean?

I believe that if you plan to invest in cryptocurrencies for the long term rather than the short term, the latest all-time high of Bitcoin should be treated in the same way as any other volatile asset.

 

The benefit of buying and holding cryptocurrencies is that you don’t have to feel driven to trade when the price is extremely high or low because you’re working within a longer investing framework. Because of the volatility of cryptocurrencies, the market rises and falls to new highs and lows.

 

If you’ve done your homework and have a well-defined investment strategy, these price fluctuations shouldn’t affect your long-term position or approach. The best advice is to carefully weigh up the pros and cons of buying Bitcoin for the long term and make sure you have a well-thought-out crypto investment plan at the outset.

 

To put it another way, some active investors may believe now is a good opportunity to profit, while others believe Bitcoin will continue to grow in value. It was reported recently in Forbes that a panel of 50 bitcoin and cryptocurrency experts has predicted,

 

“the bitcoin price will continue to climb through 2021, hitting highs of around $80,000, before surging to $250,000 by 2025 and a staggering $5 million per bitcoin by 2030”.

 

When compared to buying and holding cryptocurrencies, active trading has the advantage of allowing investors to profit from market fluctuations and new all-time highs.

 

I feel that the launch of the Bitcoin ETF is an important step forward in the mainstream acceptance and usage of cryptocurrencies, which will benefit the whole crypto industry. Indeed, in a recent Motley Fool report, it’s suggested that Ethereum, crypto’s second-biggest player could be an even better bet.

 

“I think the long-term application building potential of the Ethereum network makes Ether a more attractive option for investors looking to benefit from the evolution of blockchain technologies,”

 

argued Keith Noonan.

 

“Ether’s price per token has surged roughly 458% across 2021’s trading. Despite significantly outpacing Bitcoin’s gains across the stretch, I still think Ethereum stands a good chance of outperforming Bitcoin over the long term,”

 

he added.

 

The Bitcoin ETF has helped institutional investors gain confidence and may open the door to new retail investors. According to the latest research, more than 50 million people in the US plan to invest in cryptocurrencies next year, and the Bitcoin ETF no doubt will play a crucial role in that adoption process.

 

The cryptocurrency sector has come a long way since Bitcoin’s launch in 2009, but there is still a long way to go and numerous technical obstacles to overcome before the industry reached mainstream adoption, with the blockchain sector as a whole still missing its “killer app,” and still awaiting its “Netscape moment.”

 

The crypto community has been waiting for its own version of this moment for years.

 

“And it may have just arrived with the first U.S. Bitcoin ETF begin trading, with more are on the way, and Bitcoin and Ethereum both hitting all new all-time highs,”

 

according to Decrypt’s executive editor Jeff John Roberts.

 

The future regulation of cryptocurrencies in many nations is still an “unknown possibility”. Individual countries are expected to introduce stronger regulatory frameworks and plans relating to the Bitcoin sector soon. As reported in the FT on October 13, the SEC’s indication that it is going to look more closely at how it regulates complex exchange-traded products has implications for future bitcoin ETF rules:

 

“Last week, SEC Chair Gary Gensler directed staff to study the risks of ETFs employing strategies ‘more complex than typical stocks and bonds’ and draft potential rules to address those concerns,”

 

the FT confirmed.

 

“Bitcoin ETF could attract more than $400 million in investment accordingly to Bloomberg. This is just the beginning based on what I see. Give it a few more months, we could see double of what we see right now. Australia’s corporate regulator has given the green light to a range of cryptocurrency-related ETFs, which could see Bitcoin and Ethereum-backed investment funds trading on the ASX in the coming months. This could triple the amount. I am optimistic.”

 

Anndy Lian, Chairman, BigONE Exchange commented on Twitter.

 

To conclude, as a result, I advise investors who are taking advantage of the current bull market to be prepared. The Bitcoin market may actually become more volatile because of planned regulatory reforms.

 

by Jenny Zheng @jennyzhengEarly crypto advocate | Investor | PR Expert | Cofounder of Blockcast.cc

 

Original Source: https://hackernoon.com/how-did-investors-react-to-bitcoins-ath

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j