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U.S. congressmen propose new bill to exempt cryptocurrencies from securities laws

Two congressmen in the United states are seeking to get an exemption for cryptocurrencies from securities law. If successful, the bill could substantially improve the tax treatment for cryptocurrencies and signal a paradigm shift in how virtual currencies in the U.S. are regulated.

It has been revealed in a press release published on the 20th of December that U.S. representatives Warren Davidson and Darren Soto have introduced a new bill called the ‘Token Taxonomy Act’. This act seeks to exempt cryptocurrencies from being classified as securities. If the bill is passed, digital currency will no longer be subject to U.S. securities laws, once their projects become fully functioning networks.

A security generally refers to any financially trade-able asset. Securities laws in the U.S. originated from the Securities Act of 1933, and the Securities Exchange Act of 1934. These acts produced a method of determining whether an investment qualified as a security. This method was the Howey test.

The Howey test asks if an investment has the criteria to be classified as a security. According to FindLaw these four criteria are:

  1. It is an investment of money
  2. There is an expectation of profits from the investment
  3. The investment of money is in a common enterprise
  4. Any profit comes from the efforts of a promoter or third party.

Cryptocurrency tokens meet these criteria as people invest in these tokens with the expectation of profit gained from a third party- the token project team.

However, the proposed new bill argues that a market as modern and complex as cryptocurrency cannot be held to legal standards created 70 years ago.  This is a position held by many in the industry such as the senior market analyst for eToro, Mati Greenspan:

If the effort of these two congressmen is successful, it may lead to the emergence of cryptocurrency specific regulations in the U.S.