Everyone in the financial world has been talking about virtual currencies for some time now. The media coverage for this new asset class spiked along with the price during the 2017/2018 bull run that took the price of cryptocurrencies to their all-time highs. There is a camp of experts that believe virtual currency can be a strong driver of economic growth. However, the lack of regulatory framework has made it difficult for virtual currencies to reach their full potential.
How A Clear Regulatory Solution For Virtual Currencies Will Change The U.S Financial Market
In December last year, Darren Soto, a United States Rep along with Rep. Ted Budd, sponsored two bipartisan bills. These bills had to do with the regulation of virtual currencies in the U.S. Both bills are about allowing innovation in virtual currency space while keeping consumers safe.
The two issues that have hindered adoption in the cryptocurrency space are lack of understanding and regulations. Even if many people know about cryptocurrencies now, there are still many more consumers who have little knowledge of virtual currencies. They don’t know how these assets work, they don’t even know what asset class they fall into.
Bitcoin (BTC) Price Today – BTC / USD
The bills that have been proposed are going to provide a standard definition for cryptocurrencies. It will finally become clear if a cryptocurrency should be called a security or a currency. If a cryptocurrency is to be called a security, it must meet certain criteria as defined in the 1945 Howey Test. This stipulates that a security is an item. That is bought or sold with the intention of making a profit as a result of the effort of others. This is why publicly traded companies like Microsoft sell securities.
If you buy shares of Microsoft, you will have a stake in the company. So, you’ll partially be an owner of the company. When the company performs well, the value of the shares rises. When the company doesn’t perform well, the value drops. People buy shares because they hope that the value will increase and they will make a profit. The shareholders don’t need to be involved in the day to day operations of the company. They depend on the employees, executives, and agents to increase the value of their shares.
Cryptocurrencies like Bitcoin and Ethereum don’t fall into the security category. This is because buying Bitcoins doesn’t make you a shareholder of any firm. It doesn’t give you ownership of anything apart from the tokens. There is no company with employees, executives, agents, engineers or salespeople who labors to drive the price of shares up and bring the trader value.
The trader doesn’t rely on any company to get profit so Bitcoin cannot be called a security according to the Howey Test. Bitcoin falls closer to the currency class than the security class. Satoshi Nakamoto, the anonymous creator of Bitcoins, created cryptocurrencies to serve as currency. It was created to be used as a means of exchange during transactions. Keep in mind though that there is still an ongoing debate about this.
Some members of the cryptocurrency community say that while Bitcoin is a currency, it was created to serve as a store of value. Others say it was created to serve as a medium of exchange. All these issues are going to be addressed by the two bills. Having a clear regulatory framework for cryptocurrencies will certainly promote economic growth in the United States.
Do you think there will be a concrete regulatory framework that will guide the cryptocurrency industry? Share your thoughts below.
Max writes about blockchain projects and regulation with a special focus on United States and China. He joined Smarterum after years of writing for various media outlets.