Why Bitcoin Is Not a Security

An orange grove and bitcoin are actually related because of a Supreme Court decision. Here’s how…

The Howey Test

During 1946, the U.S. Supreme Court used a case about oranges to make a bigger statement about securities law. Their focus was a land sale.

Oranges

Our story starts when W.J. Howey Co. sold half its orange grove and kept the rest. Then, the new owners leased their half back to Howey-in-the-Hills. While Howey-in-the-Hills did all of the farming and marketing, the new owners just provided the money.

Everyone wound up at the Supreme Court because of a regulatory dispute. Although the orange grove transaction did not look like a traditional stock or bond, still the SEC said it had the authority to regulate it like one. The Supreme Court agreed through what came to be known as the Howey Test.

You just needed three criteria:

1) Money is invested,

2) In a common enterprise,

3) Where people expect profit from others’ efforts.

The result? You have a security that the SEC (Securities and Exchange Commission) can regulate.

Bitcoin

Now, more than 70 years later, the Howey Test is again in the news. Because of bitcoin’s decentralization,  the SEC will not regulate it as a security. Consequently, they need not follow the same rules that apply to stock and bond markets.

Our Bottom Line: Bitcoin

How we regulate bitcoin depends on what it is…

• Property? The IRS said bitcoin would be taxed as property.
• Commodity? The CFTC (Commodities and Futures Trading Commission) said bitcoin was a commodity
• Money? As a unit of value, a store of value, and a means of  exchange, bitcoin does not satisfy all of the characteristics of money in most countries.
• Security? The SEC said no.

Maybe though this money flower from the Bank For International Settlements best tells us what bitcoin is:

My sources and more: Thanks to marginalrevolution for alerting me to the Howey case, But for the clearest analysis of whether a cryptocurrency is a security, Wired was best. From there, for more up-to-date news, do look at this CNN article and CNBC  and this report from the BIS.

In addition, I recommend the following sources from my December bitcoin post. Please note that two sentences in Our Bottom Line were in that post.

My sources and more: When I became increasingly frustrated that bitcoin was called a cryptocurrency, I found that a WSJ journalist had the same issues. To start though, you may want to read this bitcoin primer from a St. Louis Fed blogger. It is brief and clear and ideally complements this Washington Post article. Then finally and fascinatingly, MarketWatch details the regulatory status of bitcoin around the world.

After completing this post, I read this Quartz article on Nigeria’s use of bitcoin. As an offset, it displays the potential role of bitcoin in a developing nation with a less stable currency.