Virtual currencies, such as bitcoin, have become especially popular in recent years. Different virtual currencies make headlines in the news, and the craze continues to sweep the nation as to will how legitimate the technology will become. In order to become legitimate, it would make sense that regulations will also be implemented in order to protect consumers interested in these virtual currencies.
On September 11th, 2018, we got a small look into the view of lawmakers regarding virtual currency. The U.S. District Court for the Eastern District of New York ruled in U.S. v. Zaslavskiy that U.S. securities laws may cover Initial Coin Offerings, one of the recent developments in the widely-debated topic of how to regulate virtual currencies. Initial Coin Offerings (“ICOs”) are essentially the equivalent of Initial Public Offerings (“IPOs”), which have been widely used by companies to fundraise money from investors in exchange for a stake in the company – both with the expectation the company will generate profits in the future. With ICOs, investors are given virtual currency in exchange for their financial investment in virtual currency companies.
The Court ruled that based on the “Howey Test,” which defines what constitutes as security, “a reasonable jury could conclude that the facts alleged in the indictment satisfy the ‘Howey Test’ in relation to Initial Coin Offerings.”
The “Howey Test” is based on the case of S.E.C. v. Howey from 1946, where a dispute between two parties arose out of a contract that relied upon the potential value of oranges that were to be grown on a parcel of land. The court used this precedent as an explanation into their rationale behind classifying ICOs as they would IPOs and other securities.
Based off of the brief explanation above, you would probably think that ICOs should be treated equally as IPOs, the courts have appropriately ruled, and the debate of how to regulate virtual currencies should end there. However, this ruling puts a metaphoric bandaid on the issue of virtual currency regulation. ICOs are but one of various transactions that occur almost daily that need to be addressed. There is rationale behind the courts ruling described above, however this is not where the conversation should end.
As current litigation pends and future litigation inevitably knocks at the door of the Federal Government, regulators are going to need to figure out how to properly classify and regulate virtual currencies in the United States.
Virtual currency regulations, blockchain consumer protection standards, along with safeguards against market manipulation are just a few areas that must be addressed by regulators in order to protect consumers interested in this industry.
As technology progresses, the law must adapt as well. Similar to the way computer and intellectual property law has surged to the forefront of legal discussion since the “dot com” bubble at the beginning of the century, I would not hesitate to say new virtual currency regulations will take on a similar popularity, sooner as opposed to later.