Just another currency
Talk to a bitcoin maximalist – someone who believes that bitcoin is the only digital asset with innate value – and, more likely than not, they’ll tell you the world’s oldest cryptocurrency is, in fact, ‘not crypto’ at all.
The refrain can be confusing: clearly, bitcoin pioneered the use of cryptography – an ultra-secure type of encryption – with the aim of creating a digital currency. Bitcoin is the archetypal crypto.
And yet, in the context of how the digital asset marketplace has evolved since 2009, when bitcoin was created, it’s easy to see why maximalists distance themselves from the more generic term. Today, there are thousands of copycat cryptos. It’s true that a few are experimenting with innovative technologies – algorithms that bitcoin may, one day, absorb into its code – but the vast majority can be dismissed as scams and get-rich-quick-schemes.
To many in the space, crypto has become a euphemism for fraud and exploitation – the opposite of the autonomous digital cash Satoshi Nakamoto set out to create.
The US Securities and Exchange Commission (SEC), America’s financial regulator, shares this concern and has tried to protect consumers from unscrupulous players in the cryptosphere. Its main weapon is an offensive defense: clipping the wings of dodgy cryptos by attacking the exchanges, or digital marketplaces, where they’re traded. That’s why the SEC sued Binance and Coinbase last month: fewer consumers will be left out of pocket, the regulator hopes, if it becomes harder to buy and sell these speculative instruments.
The SEC’s strategy hinges on a claim that most cryptos can be classified as “securities”, or financial instruments that give the holder a tradable stake in a profit-making enterprise. As such, any entity facilitating their trade needs to jump through certain hoops in order to stay on the right side of US Securities law. If they fail to do so, they face lawsuits, fines and potential dissolution.
It’s a regulatory minefield that staff at crypto exchanges are only too aware of. “We are operating as a fking unlicensed securities exchange in the USA bro,” fretted Binance’s chief compliance officer in an internal message in 2018, according to evidence published by the SEC.
But here’s where it gets interesting for maximalists: in order to prove whether or not a crypto is a security, the SEC relies on precedent set by the US Supreme Court in 1946 (specifically, SEC v. W. J. Howey Co).
The so-called Howey test holds that an “investment contract” amounts to a security if three conditions are met: (1) there’s an investment of money; (2) the investment is made in a common enterprise; and (3) there’s an expectation that profits will be derived from the efforts of others. In the SEC’s recent case against Ripple Labs, a US District Court found that the XRP token does not constitute a security when sold to the general public via exchanges (an appeal is expected). But judges have sided with the regulator in other, smaller cases.
The issue often boils down to whether or not the promotion and development of a crypto by its founders constitutes the “efforts of others”. If the token is relatively centralized or small in market cap, and if the team behind the token has made claims about their ability to drive up its price, then the Howey test is likely to be passed.
Crucially, none of that applies to bitcoin – the world’s most decentralized crypto, with a market cap nearly equal to all other cryptos combined, whose founder neither pre-mined any coins nor has any ongoing involvement in the project – and the SEC knows it.
“We believe every [crypto] asset other than bitcoin is a security,” the SEC supposedly told Coinbase before filing its litigation, according to paraphrased remarks by Brian Armstrong, the exchange’s chief executive.
Speaking to The Financial Times in an interview published on July 31, 2023, Armstrong recalled hitting back at the regulator about its radical interpretation of securities law – one that would effectively cripple the US crypto industry if upheld by the courts. The SEC’s response, he claims: “We’re not going to explain it to you. You need to de-list every asset other than bitcoin.”
This isn’t the first time that the SEC has treated bitcoin as a special case. In February, SEC chair Gary Gensler told New York magazine: “[For] everything other than bitcoin you can find a website, you can find a group of entrepreneurs … These [other] tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group.” His predecessor Jay Clayton struck a similar tone in 2018, telling CNBC that bitcoin is “not a security” because it’s intended as a “[r]eplacement for sovereign currencies”.
We should acknowledge here that regulators are still finding their feet in the cryptosphere. The Commodity Futures Trading Commission (CFTC), for example, another US financial regulator, stated in a 2021 filing that Ether, Litecoin and Tether also qualify as “commodities, not securities”.
Even so, the SEC’s lawyers will surely have done their homework on the design and distribution of cryptos before going to court. And, for now at least, they seem to be arguing that bitcoin – and bitcoin alone – has attained the status of decentralized digital cash; an autonomous currency beyond the control of vested interests. Well done Satoshi. Maximalists rejoice.
