Journal of Information & Privacy Law

Cryptocurrency: Should it be regulated?

By Matthew J. Roberts (AKA Jared Franklin), Symposium Editor on Monday, November 27th, 2017
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One of the major cases regarding the future of Cryptocurrency is the case of the United States Securities and Exchange Commission v. Recoin Foundation, LLC.1 This case by the Securities and Exchange Commission (“SEC”) has the SEC alleging that Recoin and its members violated multiple sections of the 1993 Securities Act and the 1934 Securities Exchange Act.2 As previously mentioned in another blog post this case turns on whether Recoin can be considered a security or is it just another form of currency.3 There are two ways that cryptocurrency can be regulated by a government agency. One way is for the SEC to establish that it is a security and regulate using securities law. The other way is to have the IRS regulate it like cash, but this second way is unlikely due to the issuance of the case brought by the SEC mentioned previously.

In order to establish that a cryptocurrency qualifies as a security the SEC must use the test that the Supreme Court established in SEC v. Howey.4 This test breaks down a security into four factors. Those factors are whether money has been given for the alleged security, whether the people who have given money are a part of a common enterprise, whether there is an expectation for profit, and the profit comes solely form the work of others.5 The Supreme Court determined that because Howey was inducing people to invest in the acreage for their orange groves the first factor was met.6 The fact that Howey was getting these people to invest in a venture that they owned and the people either made or lost money together based on the success of the venture fulfilled the common enterprise element.7 The next two elements were quite obvious for the court since those who invested did not work in the orange grove for their profit and they invested money in order to make money.8

Under the framework the Supreme Court established in Howey it is very likely that Recoin will be determined to be a security by the New York District Court. This is due to the fact that Recoin induces or calls for people to invest money in the cryptocurrency.9 Another fact that establishes that Recoin was to be presented as an investment is the fact that Recoin itself stated that the cryptocurrency was stated to be an “attractive investment opportunity that grows in value.”10 In addition those investing in this cryptocurrency can be presumed that they invested with the intent to make a profit fulfilling expectation of profit.11 Those who have invested would have their investment go up or down based on the markets that the money from people buying in would have their money put into.12 Lastly the work in order to make money from the investment would not be done by the investors but by Recoin Foundation. With these four factors being fulfilled it is very likely that the New York District Court determines that Recoin is an investment contract that should be regulated by the SEC as a security.

Regulating cryptocurrency as a security is not the only avenue for regulation. If the New York District Court does not determine that Recoin is an investment contract the IRS could still regulate this new form of digital currency just like it does cash. This second method of regulation does not fill as well as determining that Recoin is a security because the rules governing the regulation of cash do not seem to be easily translated into a completely intangible and digital currency.13

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  1. United States Securities and Exchange Commission v. Recoin Foundation, LLC, 1:17-cv-05725-RJD-RER (2017). https://www.bloomberglaw.com/product/blaw/document/X1Q6NTIFDBO2?imagename=1-1.pdf&bc=W1siRG9jdW1lbnQiLCIvcHJvZHVjdC9ibGF3L2RvY3VtZW50L1gxUTZOVElGREJPMj9kb2NfaWQ9WDFRNk5USUZEQk8yJmRvY190eXBlPURPQ0tFVFMmamNzZWFyY2g9bnVsbCZyZW1vdmVfanM9ZmFsc2UiXV0–331f14621af6257c8139b68788abaea0b894e6ab
  2. These sections include Sections 5 and 17 of the 1933 Act and section 10b of the 1934 Securities Exchange Act.[note]United States Securities and Exchange Commission v. Recoin Foundation, LLC, 1:17-cv-05725-RJD-RER (2017): paragraph 10 of the Complaint. https://www.bloomberglaw.com/product/blaw/document/X1Q6NTIFDBO2?imagename=1-1.pdf&bc=W1siRG9jdW1lbnQiLCIvcHJvZHVjdC9ibGF3L2RvY3VtZW50L1gxUTZOVEl
    GREJPMj9kb2NfaWQ9WDFRNk5USUZEQk8yJmRvY190eXBlPURPQ0tFVFMmamNzZ
    WFyY2g9bnVsbCZyZW1vdmVfanM9ZmFsc2UiXV0–331f14621af6257c8139b68788abaea0b894e6ab
  3. See Cryptocurrency: Digital currency or security? By Quinn O’Grady {JITPL blog website}
  4. See SEC v. Howey, 328 U.S. 293, et al. (1946).
  5. See SEC v. Howey, 328 U.S. 293, 298 (1946)
  6. SEC v. Howey, 328 U.S. 293, 299 (1946)
  7. SEC v. Howey, 328 U.S. 293, 299-300 (1946)
  8. SEC v. Howey, 328 U.S. 293, 299-300 (1946)
  9. United States Securities and Exchange Commission v. Recoin Foundation, LLC, 1:17-cv-05725-RJD-RER (2017): paragraph 27 of the Complaint. https://www.bloomberglaw.com/product/blaw/document/X1Q6NTIFDBO2?imagename=1-1.pdf&bc=W1siRG9jdW1lbnQiLCIvcHJvZHVjdC9ibGF3L2RvY3VtZW50L1gxUTZOVElGREJPMj9kb2NfaWQ9WDFRNk5USUZEQk8yJmRvY190eXBlPURPQ0tFVFMmamNzZWFyY2g9bnVsbCZyZW1vdmVfanM9ZmFsc2UiXV0–331f14621af6257c8139b68788abaea0b894e6ab
  10. United States Securities and Exchange Commission v. Recoin Foundation, LLC, 1:17-cv-05725-RJD-RER (2017): paragraph 29 of the Complaint. https://www.bloomberglaw.com/product/blaw/document/X1Q6NTIFDBO2?imagename=1-1.pdf&bc=W1siRG9jdW1lbnQiLCIvcHJvZHVjdC9ibGF3L2RvY3VtZW50L1gxUTZOVElGREJPMj9kb2NfaWQ9WDFRNk5USUZEQk8yJmRvY190eXBlPURPQ0tFVFMmamNzZWFyY2g9bnVsbCZyZW1vdmVfanM9ZmFsc2UiXV0–331f14621af6257c8139b68788abaea0b894e6ab
  11. United States Securities and Exchange Commission v. Recoin Foundation, LLC, 1:17-cv-05725-RJD-RER (2017): paragraph 29 of the Complaint. https://www.bloomberglaw.com/product/blaw/document/X1Q6NTIFDBO2?imagename=1-1.pdf&bc=W1siRG9jdW1lbnQiLCIvcHJvZHVjdC9ibGF3L2RvY3VtZW50L1gxUTZOVElGREJPMj9kb2NfaWQ9WDFRNk5USUZEQk8yJmRvY190eXBlPURPQ0tFVFMmamNzZWFyY2g9bnVsbCZyZW1vdmVfanM9ZmFsc2UiXV0–331f14621af6257c8139b68788abaea0b894e6ab
  12. See United States Securities and Exchange Commission v. Recoin Foundation, LLC, 1:17-cv-05725-RJD-RER (2017): paragraph 29 of the Complaint. https://www.bloomberglaw.com/product/blaw/document/X1Q6NTIFDBO2?imagename=1-1.pdf&bc=W1siRG9jdW1lbnQiLCIvcHJvZHVjdC9ibGF3L2RvY3VtZW50L1gxUTZOVElGREJPMj9kb2NfaWQ9WDFRNk5USUZEQk8yJmRvY190eXBlPURPQ0tFVFMmamNzZWFyY2g9bnVsbCZyZW1vdmVfanM9ZmFsc2UiXV0–331f14621af6257c8139b68788abaea0b894e6ab
  13. For more on the possibility that Recoin could be regulated by the IRS and not the SEC See Omri Marian, “A Conceptual Framework for the Regulation of Cryptocurrencies”, 82 U.Chi. L. Re. Dialogue 53, 68 (2015-2016)

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