KEY POINTS

  • Regulation is coming, but some cryptocurrencies are better prepared than others
  • Comments from officials signal that they recognize that Bitcoin is not like other cryptocurrencies
  • It is more likely that the CFTC, not the SEC, will oversee Bitcoin

For years, government officials have debated what government agency should regulate Bitcoin (BTC 5.24%). Some believe that the most valuable cryptocurrency should fall under the discretion of the Securities and Exchange Commission (SEC), which oversees securities on stock markets. Others propose that it belongs with the Commodity Futures Trading Commission (CFTC), which already handles Bitcoin future contracts.

While the entire crypto economy remains in the crosshairs of regulators, it seems that politicians and agency officials are starting to realize that not every cryptocurrency is cut from the same cloth.

The chairman sounds off

In a recent interview on CNBC, SEC Chairman Gary Gensler was asked to discuss his views on the future of crypto regulation in the US.

While discussing the extent of the SEC's possible role in the regulation of cryptocurrencies, he specified that one cryptocurrency is different from the rest. He opined that unlike other cryptocurrencies that should fall in the SEC's jurisdiction, Bitcoin is a commodity and should have a home in the CFTC. Gensler's reasoning is that there is no central entity behind it that profits and no specific group of entrepreneurs or developers promoting it to lure investors like other tokens out there today. In a roundabout way, Gensler pointed out that Bitcoin is decentralized -- one of its defining characteristics.

Gensler believes that Bitcoin likely belongs under the jurisdiction of the CFTC since it does not meet the criteria of being a security. As a former chairman of the CFTC too, Mr. Gensler likely has more expertise on this matter than anyone else in the U.S. government.

Not only has he served as the chairman of both agencies, but he also taught blockchain and crypto courses at the Massachusetts Institute of Technology. You could say he is more than qualified on these sorts of matters.

bitcoin -- Fool.com
Bitcoin Fool.com

Does it pass the test

Of more interest is that Gensler's comments also fall in line with the recent introduction of a bipartisan crypto bill that was drafted by Senator Kirsten Gillibrand of New York and Senator Cynthia Lummis of Wyoming. Although the bill has not been ratified, it is arguably one of the most comprehensive pieces of legislation on cryptocurrency.

The bill covers a plethora of aspects of the crypto economy, including stablecoins, mining, and most important, what agency oversees particular cryptocurrencies.

In the bill, the senators chose to use the Howey Test as a means for determining whether a particular cryptocurrency falls under the jurisdiction of the SEC or the CFTC. The Responsible Financial Innovation Act proposes that cryptocurrencies that pass the Howey Test will have to register with the SEC like any other security trading on the stock market.

The Howey Test is the result of a 1946 Supreme Court case for determining whether an asset is a security and therefore regulated by the SEC. Assets are considered securities if there is an "investment of money in a common enterprise with reasonable expectation of profits to be derived from the efforts of others". In crypto, this means that things like ICO's (initial coin offerings), which utilize crowdfunding in exchange for a token that investors hope to increase in value are a security.

In Title III of the bill, it states that cryptocurrencies, which are completely decentralized and that don't pass the Howey Test, will be overseen by the CFTC.

It seems that this part in particular was written just for the most decentralized cryptocurrency on the planet.

This determination should be received well by investors, not because the CFTC will regulate better than the SEC or Bitcoin will perform better if overseen by the CFTC but because even agency officials at the highest levels of government realize they cannot regulate Bitcoin like other securities. It's almost a badge of honor that since it was originally designed as an antigovernment-asset, Bitcoin is now receiving this recognition of being decentralized from the government itself.

Looming legislation

The crypto landscape will dramatically change in the coming years. Recent events like the implosion of the Terra blockchain, bankrupt lending platform Celsius halting withdrawals, and crypto hedge fund Three Arrows Capital, which also filed bankruptcy, have set a precedent for government intervention to protect investors.

Even though regulation is on the horizon, Bitcoin investors should be confident that this coming legislation will treat the most decentralized cryptocurrency differently from the others. Obscure tokens with known developers behind them will find themselves in a tough regulatory environment, but Bitcoin will continue to operate just as it has since 2009.

This article originally appeared in The Motley Fool. The Motley Fool has a disclosure policy.

Major financial institutes are viewing Bitcoin as a new asset class.
Major financial institutes are viewing Bitcoin as a new asset class. Pexels