The now widely known (and often misunderstood) cryptocurrency called “Bitcoin” began its journey as an obscure project on a small e-mail list frequented by a handful of cryptographers. That project, which promised to be the first-ever functional "peer-to-peer electronic cash system," has led to a booming cryptocurrency asset class valued at over $3 trillion during its peak. This expansive landscape inspired many entrepreneurs to try their hand at inventing “the next Bitcoin” by introducing their own tokens or digital assets, often without any inclination as to how these assets will interact with the preexisting regulatory framework. Although there are many areas of regulatory uncertainty in the cryptocurrency space, one of the most notable today is United States securities law.
Despite the advent of tens of thousands of new cryptocurrencies, Bitcoin remains the blueprint for securities compliance (even if that compliance was wholly by accident). Nevertheless, developments in the cryptocurrency space have pushed entrepreneurs in different directions when it comes to launching a new token. Following Ethereum's emergence, for example, developers were able to harness its robust programming language to establish the ERC-20 protocol, revolutionizing token creation. This development cleared the way for the rapid launch of tokens, even by those with limited technical expertise. However, as enthusiasm grew, the SEC escalated its enforcement efforts against token issuers and promoters. To assess whether a cryptocurrency offering constitutes an "investment contract" subject to the regulatory oversight of the United States Securities and Exchange Commission (“SEC”), courts and the SEC itself look to the four-factor Howey test, which the Supreme Court first outlined nearly a century ago. And despite more than a decade of cryptocurrency creation, it remains unclear just how many are subject to the jurisdiction of the SEC. Nevertheless, Bitcoin’s unique origin story and supply distribution offer insight into how to avoid the heavy hand of securities regulators.
While the cryptocurrency space continues to expand, regulatory surveillance from the SEC grows in tandem. Amid these dynamics, the recommendation emerges that future projects hoping to avoid regulatory challenges should mimic Bitcoin's foundational structure and launch to the extent practicable. However, if such an arrangement contradicts business goals, the possibility that the project is actually an offer or investment in an unregistered security should be considered. In essence, the journey from an obscure digital experiment to a major financial player underscores the complex interplay between innovation and regulation in the cryptocurrency realm. And while it may eventually be the case that numerous cryptocurrencies will survive regulatory scrutiny from the SEC, the only thing that is certain today is that Bitcoin is the outlier.
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