Even though Bitcoin was birthed in 2009 as the world’s first cryptocurrency, recent events associated with the 3 Arrows Capital, Celsius, Voyager, Alameda Research, BlockFi, and FTX collapses, and subsequent bankruptcies, show that regulation is lagging 14 years later.  

The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have been regulating cryptocurrencies for years, but there remains massive uncertainty and disagreement. All parties agree on the legal standard to determine whether an asset is a security subject to SEC regulation, or a commodity subject to CFTC regulation.  

However, the standard was written in 1946 – the year after World War 2 ended – and has proven difficult to apply to these nascent technologies. This has been further complicated by a history of contradictory statements and shifting positions on whether a cryptocurrency constitutes a security or not.  

The Howey Test: Is cryptocurrency an “Investment Contract?”

According to the United States Supreme Court Case of SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (“Howey“), and subsequent case law, digital assets are scrutinized to see if they meet the definition of an “investment contract.” If so, they are securities subject to SEC jurisdiction. According to Howey, there are four elements which must be met to prove something is an “investment” contract. Those elements are: 

1. An investment of money; 
2. In a common enterprise; 
3. With the expectation of profit; and 
4. Those profits being derived from the efforts of others. 

Although these elements may seem straightforward, the Howey court could not contemplate the nature of cryptocurrencies or blockchain technology when it issued its ruling. Neither could Congress have predicted these technologies when they passed the Securities Acts of 1933, Securities Exchange Act of 1934, and the Investment Company Act of 1940. The result has been inconsistent regulatory messaging between the SEC and CFTC as they struggle with applying Howey. 

The Morass: Regulatory overlap and confusion 

There are thousands of cryptocurrencies, but Bitcoin is the only one that is currently officially classified as a commodity by both the SEC and CFTC. The world’s second largest cryptocurrency, Ether, still has no regulatory clarity. This lack of clarity creates problems for entrepreneurs, stifles innovation, and can result in people with good intentions inadvertently violating securities laws. 

There is no dispute between the SEC and CFTC about their regulatory missions. If a cryptocurrency is a security, then the SEC has jurisdiction over it and enforces the securities laws. If it’s a commodity, then the CFTC has jurisdiction and enforces commodities laws. There is also no dispute about the legal standard to be applied. If a cryptocurrency meets the Howey test definition of “investment contract” then it is a security, if it does not then it is a commodity. Despite this clear understanding, there are still questions over jurisdiction. This becomes obvious when we look at the history of regulation between major cryptocurrencies like Bitcoin, Ether, and Ripple (XRP). 

A timeline of cryptocurrency regulation

The following is a timeline of regulatory events, statements, and legal proceedings from Bitcoin’s inception in 2009 to the present. The timeline is broken into different “eras” in the history of cryptocurrency based on price movements. This article does not take a stance on the issue of cryptocurrency prices affecting regulation, but the reader is free to make their own conclusions after reviewing the timeline. 

Note: “Bitcoin” and “Ether” refer to the cryptocurrencies themselves, whereas “Bitcoin network” and “Ethereum” or “Ethereum Network” refers to the network and not the cryptocurrency. Colloquially, Ether and Ethereum are usually interchangeable, but do have nuanced differences. The timeline will show many quotes where regulators refer to Ether as “Ethereum.”  

The birth of cryptocurrency – Bitcoin

The first years of cryptocurrency’s existence are somewhat unremarkable compared to today’s headlines, but they have their fair share of fraud and criminal conduct. We see the same problems we deal with today like the freezing of customer withdrawals. The following timeline reveals the inherent difficulties in regulating new technology with old regulations.

2009: Bitcoin is created and the “genesis block” is mined. Bitcoin has a price of $0. 

May 22, 2010: In a day that will live in infamy in the cryptocurrency sphere, a Florida man by the name of Laszlo Hanyecz posts to the Bitcoin forum. He confirms he has successfully traded 10,000 Bitcoin for two Papa Johns pizzas. 10,000 Bitcoin is worth $41. 

Years later, Bitcoin prices will hit $68,000, meaning Mr. Hanyecz spent $690 million on two pizzas. He is forever dubbed the “Bitcoin Pizza Guy.” He is, however, credited as the first person to prove the value proposition of Bitcoin as a medium of exchange. 

Early 2011: A young man named Ross Ulbricht founds the Silk Road website on the dark web. The Silk Road is a marketplace where users can exchange Bitcoin for illicit goods, including narcotics, hacking services, pirated software, forged documents, etc. It is essentially an online black market. This marks the beginning of cryptocurrency’s association with criminal activity. The notion that all cryptocurrency is primarily used to facilitate crime will continue to persist. 

June 7, 2011: Bitcoin hits a price of $29.60. 

June 2011: U.S. Senator Chuck Schumer asks federal law enforcement agencies, including the Drug Enforcement Administration and the Department of Justice, to shut down the Silk Road. 

August 20, 2011: The world’s first Bitcoin conference is hosted in New York City. 

November 2011: Bitcoin bottoms out at $2.05. 

August 2012: Bitcoin rebounds to $13.50 

April 8, 2013: Bitcoin reaches $230. 

May 15, 2013: The Department of Homeland Security (DHS) issues a seizure order to Dwolla, a subsidiary of Mt. Gox, a Japanese bitcoin trading platform. Mt. Gox is responsible for 70% of all bitcoin trading volume. The order accuses Dwolla of operating as an unlicensed money transmitter. 

July 4, 2013: Bitcoin price hits $68.50. 

October 2013: The Silk Road is shut down by the FBI. Ross Ulbricht is found and arrested. The FBI seizes 144,000 Bitcoin from the Silk Road. Mr. Ulbricht will be convicted and sentenced to two life sentences without the possibility of parole. The FBI will auction off the Bitcoin in 2014. 

November 2013: Mt. Gox users report experiencing delays in withdrawing their assets. 

December 2013: Bitcoin spikes in price to $1,237.55, and then falls to $687.02 three days later. Bitcoin continues to decline and languish through 2014. 

The first few years of Bitcoin’s existence were marked by criminal conduct and some of the warning signs of the issues we see today like freezing of withdrawals. Regulators responded through law enforcement agencies like the FBI and DHS. In the years that follow, it will be obvious the freezing of withdrawals precedes bankruptcy and later reveals fraud that should have been prevented. While it’s good to see regulators swoop in after the fact, it isn’t helpful to prevent the crimes or return the assets to the people who lost them. The introduction of the Ethereum network will force efforts by regulators to tangle with this new technology and its potential risks for fraud.

Read Part 2 of our series on the history of cryptocurrency regulation in America, where Sean Gellis covers the birth of the Ethereum network, the 2017 Bull Run, and the long crypto winter that followed it.

Sean Gellis is the founder of Gellis Law, PLLC, a Florida-based legal and consulting firm focused on GovTech and regulation. Prior to opening his firm, Sean spent nine years in public service, including as the chief of staff for the business arm of Florida government and general counsel of the nation’s third largest state transportation department.