Is Bitcoin a Security?

One of the hottest debates in the cryptocurrency market today is the definition of an investment security and whether cryptocurrencies should be included. As the first and largest cryptocurrency, Bitcoin’s regulatory classification is important. At the moment it is in a bit of a gray area where it could be considered a security in the future, but it isn’t being treated as one in March 2023.

The debate has been slow-moving among U.S. regulatory agencies, but it may soon come to a head in 2023. Ripple (XRP), a popular cryptocurrency designed to replace traditional payment infrastructures like SWIFT, has been fighting the U.S. Securities and Exchange Commission (SEC) since 2020. The SEC alleges that XRP is a security and that the team illegally sold the token without submitting to required government regulation. This case will set a regulatory precedent. If the courts decide that XRP is a security, Bitcoin might also be classified as a security. 

Is Bitcoin a Security?

Whether Bitcoin is a security is a matter of opinion because of its vague legal definition. A security represents ownership of an underlying asset and is tradeable between parties. The most common securities are stocks and bonds. Bitcoin is a decentralized digital currency, purchased for trading and price speculation and as a hedge against government overprinting of dollars. It can be traded on cryptocurrency exchanges like Coinbase and Uphold.

While the SEC has yet to issue a definitive ruling on Bitcoin's classification as a security, it has acknowledged that cryptocurrencies could fall under this category and be subject to federal security laws. The SEC clarified its position by stating that crypto regulation will be case by case for cryptocurrencies and will depend on the different circumstances surrounding the coin.

The Howey Test Applied to Bitcoin

The Howey Test determines whether a transaction is an investment contract — and a security — under U.S. law. This test is based on the U.S. Supreme Court case SEC vs. W.J. Howey Co. The ruling enacted four key requirements that each investment contract must meet to be ruled a security:

• An investment of money 
• A common enterprise 
• Reasonable expectation of profits 
• Derived solely from the efforts of others 

While it appears that Bitcoin does not fall under this category, other cryptocurrencies may be more closely aligned with this guideline. 

For example, unlike Bitcoin, Ethereum has a public organization that is working on its protocol. It is continually being upgraded, and as it improves, ETH holders benefit. Ethereum is not classified as a security in March 2023, but that could change in the future.

The Argument for Bitcoin Being a Security

An argument could be made that Bitcoin holds enough similarity to a security that it should be classified as one. However, ruling Bitcoin a security would be a huge blow to the crypto sector. Experts who believe that Bitcoin should be categorized as a security cite the manipulation of the coin, the people profiting from it and the fraud going on because of the lack of regulation. The recent FTX collapse was a massive blow to the crypto ecosystem, highlighting the scams, collapses and Ponzi schemes rumbling throughout the crypto sector. If these events continue, Congress could vote to regulate the industry, and ruling Bitcoin as a security is one plausible act if this scenario takes place.

Why Bitcoin Isn’t a Security

Bitcoin somewhat fits into the Howey test, but it doesn’t meet all four points. While a large reason people purchase Bitcoin is to profit, its use and basis differ from that of the stock of a human-run company that you hope will hit its quarterly marks, ship great products and maximize its profitability. Bitcoin exists as a decentralized digital currency, not a company run by a CEO and other paid employees.

What Happens if the SEC Says Bitcoin is a Security?

If the SEC rules Bitcoin as a security, the entire crypto ecosystem will be impacted. The move would increase regulation over cryptocurrency issuers and be a burden to many. Bitcoin would be subject to oversight from the SEC, which would increase costs and decrease control of the investors and exchanges. If Bitcoin is ruled a security, all cryptocurrencies would likely see a stunt in growth.

How to Buy Bitcoin

In the early days of Bitcoin investors had to contend with shady sites and exchanges to get their coins. Now there are a myriad of reputable crypto exchanges that offer Bitcoin with low fees. Some of the best are Uphold, Coinbase, Robinhood and eToro. It only takes a few minutes with these platforms for most people to sign-up, verify your identity, deposit funds and start trading.

What Are Security Tokens?

A security token is a cryptocurrency that represents ownership over an underlying asset, such as shares in a company, debt, property or other rights. They are the cryptocurrency version of traditional securities like stocks and bonds. Tokens offer key advantages over traditional securities, such as fractionalized shares, increased liquidity and lower transaction fees. The SEC approves security tokens under security regulations, making them more difficult to create. However, security tokens avoid the regulatory gray area that cryptos fall into. They could be a vital step in bringing institutions into the crypto ecosystem. 

What Is Bitcoin Considered, If Not a Security?

Bitcoin is a digital currency. While speculation over the price of Bitcoin is similar to securities, no underlying value exists for Bitcoin and no one company works on it. It is used as a form of currency and is subject to the basic economic principle of supply and demand. Satoshi Nakamoto, the founder or founders of Bitcoin, created Bitcoin with the intention that it would be difficult to change the protocol. The inability to transform Bitcoin and the lack of a controlling entity behind the coin mean less of a chance that Congress will rule Bitcoin as a security.