“A US Supreme Court verdict from 1946 suffocates the cryptocurrency market. The problem was noticed both by congressmen and the US financial regulator. However, it is most likely that it will not be solved quickly, and cryptocurrencies will face difficult months,” writes Bartosz Grejner, Conotoxia Analyst.
Cryptocurrencies prices have been at a standstill for weeks. Bitcoin quotations still oscillate around 3.5 thousand USD. The main problem which prevents a return to the upward trend is the low level of trust of both consumers and financial institutions. Recovery could be achieved by introducing regulations in key markets, such as the US, which would resolve some uncertainties concerning cryptocurrencies.
Escape to Switzerland
Among the issues that need to be clarified is how to treat tokens issued under ICOs (initial coin offerings). Handling these tokens in the same way as securities can cause great difficulties for issuers, e.g. start-ups wishing to elevate their business. This would be the same as imposing a whole series of formal requirements, making many projects unprofitable. Therefore, it is not surprising that companies are simply escaping the US to friendlier, in this respect, countries like Switzerland or Malta. According to a report from PwC, for every 100,000 inhabitants of Switzerland, there are five start-ups focusing on cryptocurrencies and blockchain technology, while in the US there is only one.
Howey's test 70 years later
A year ago, the Swiss financial regulator (FINMA) published guidelines on how it will treat different types of ICO tokens. Thanks to that, both companies and investors have had a clear picture which tokens will be treated as securities and which will not. SEC, the financial supervisor in the US, in order to determine what is a security and what is not, uses the so-called Howey test. It came from a case from 1946, which concerned the sale of a contract for the development of an orange grove. The US Supreme Court recognised, in favour of SEC, that it was an investment contract meaning "a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise."
How to escape from the securities framework?
ICO tokens are also subject to the same test. However, taking into account the decentralised nature of cryptocurrencies, it seems that a part of the tokens does not meet the definition of an investment contract, the other part fulfils the requirements, but for some of them, it is difficult to determine. There is no need to go back far in order to find practical examples of this issue. In mid-December, the Basis project returned all of the 133 million USD collected under an ICO, as the application of law adequate for securities made it practically impossible to launch the project.
This does not mean that cases like the one described above remain unnoticed. During a speech at the University of Missouri on February 8th, the SEC Commissioner Hester Peirce stressed the need for action to support cryptocurrency innovation without jeopardising current securities legislation. She admitted that some of the projects may simply become unreasonable because of Howey's test and the rights arising from it. Peirce, also known as "Crypto Mom", did not want to comment on specific cases, but said that "...my antennae will go up when apparently legitimate projects cannot proceed because our securities laws make them unworkable."
Long way through Congress
Congress may be the place to look for hope in solving problems for cryptocurrencies resulting from Howey's test. Last year, the Representatives Warren Davidson and Darren Soto presented the so-called "Token Taxonomy Act", which aims to determine that tokens (or at least some of them) are not securities and deserve to be treated as a separate asset class. In theory, this could significantly boost the ICO market in the US, and as a result, could also positively influence cryptocurrency prices. However, the bill got stuck in Congress and has to be presented again.
Although this seems to be a step in the right direction, its implementation may take months or even years. Until then, hope for a rebound in cryptocurrency prices should probably be sought elsewhere.