Cato Institute calls for clarity in crypto regulatory debate
A US think tank has called for greater clarity in the regulatory intentions of US authorities regarding cryptocurrencies: most notably, in the ongoing debate over whether cryptocurrencies are securities or not.
To this end, the Cato Institute recommends that all existing cryptocurrencies should be treated as commodities, and not securities, thereby avoiding subjecting the asset class to “onerous registration requirements” that “chill innovation and put cryptocurrencies out of the reach of retail buyers and start-ups”.
Security or not?
The paper from Cato first defines what constitutes a security using the Howey test, a 1946 Supreme Court ruling – a security is a contract involving and investment of money in a common enterprise with the expectation of profits from the efforts of others.
Diego Zuluaga, author of the paper, says: “One would be hard pressed to argue that a cryptocurrency network is a common enterprise when the roles and intentions of its users are so varied.
“The profits from holding and using cryptocurrencies, moreover, do not accrue from the efforts of others but rather from the cryptocurrencies’ usefulness on the network.”
This probably tallies with the thinking of Securities and Exchange Commission (SEC) officials Jay Clayton, chairman and William Hinman, director of corporate finance: both believe bitcoin and ethereum are not securities as measured by the Howey test – but have been reticent deciding on other existing crypto coins.
Initial coin offerings
One area in which both the SEC and the Cato Institute agree is that initial coin offerings (ICOs) should be regarded as securities.
“ICOs can allow start-ups to raise capital from investors or future customers. In certain circumstances, the promises of future tokens issued in an ICO may therefore meet the definition of a security,” says Zuluaga.
Yet the lack of regulatory response remains a mystery to the Cato paper’s author. Indeed, surely the ICO market must expect some action to come?
“It is puzzling that the SEC chairman has repeatedly claimed that all ICOs he has seen are securities. If that is the case, enforcement actions against ICO issuers may be expected to increase in the future,” Zuluaga adds.
A future framework
The market, however, needs clarity. It is the opaque response to cryptocurrencies by US and global regulators that is largely responsible for current price turbulence in the market.
“Business and regulatory uncertainty is at least partly responsible for the volatility observed in cryptocurrency markets,” says Zuluaga.
The paper recommends a regulatory framework that is, first and foremost, unambiguous and, secondly, does not stifle the creativity and potential of the sector.
“Cryptocurrencies are a new and promising technology, the benefits of which remain little understood and hotly disputed.
“Policy uncertainty and ambiguous statements by financial regulators further complicate an assessment of the risks and rewards that ownership of this asset class can bring.”