Cryptocurrencies Get Hammered! First The IRS, Now The SEC.

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You saw it here last week, the IRS has licensed software to track block chain transactions, seeking to identify tax cheats who try to hide their transactions behind the block chain anonymity.

And this week, the SEC dropped another hammer when they issued a ruling that initial offerings of cryptocurrencies may be regulated as securities.


The ruling, the result of an investigation into the case of The DAO, a cryptocurrency that collapsed last year when hackers were able to exploit a software vulnerability and skim over $50 million dollars, approximately one-third of the funds The DAO had raised in its initial offering.

Personally, cryptocurrencies are not mainstream enough for me to feel secure with them. I have enough trouble every time I use my credit card or my debit card to make a transaction. I keep wondering what will happen to the economy if earth gets hit with a giant solar flare.

Don’t laugh, it happened in 1989 when the entire Canadian province of Quebec lost power, and half the U.S. Power grid teetered back and forth on the brink of disaster due to a massive solar flare.

The economic ramifications of a massive solar flare could be dire.

It is estimated that a solar flare could cost the U.S. Economy upwards of $40 billion dollars a day. Economic transactions would be lost, bank accounts could be wiped out, and the internet would be showing TV screen test patterns.

But, speculators continue to pour hard dollars into electronic currencies, despite the fragility of a system dependent upon the continued existence of an ethereal Angstrom Unit, oblivious to the risks of electromotive pulses, the IRS and the SEC.

It is estimated that a solar flare could cost the U.S. Economy upwards of $40 billion dollars a day Click To Tweet

A loss of funds held in a cryptocurrency would be subject to the same capital loss reporting requirements as losses on other investments, very limited, and limited to investment income.

Since the SEC is not bringing charges in the case of The DAO, they are putting other issuers on notice that only new cryptocurrencies will be regulated. Maybe, maybe not. Whatever their intent, they are putting the world on notice that in the U.S., cryptocurrencies are not currencies, they are investments, just as currencies of other countries are when held by investors.

As the SEC report put it;

“U.S. federal securities law may apply to various activities, including distributed ledger technology, depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular [cryptocurrency] offer or sale.”

Woohoo, a big mouthful. But, in its simplest form, purchasing cryptocurrencies is most likely the purchasing of a security.

But, Dear Heart, there is an opportunity to examine the situation a bit more closely.

Let’s take a look at the Howey test.

The “Howey Test” was created by the Supreme Court as a means of determining whether certain transactions qualify as “investment contracts”.

[The test refers to a precedent from a case the SEC levied against Florida companies W. J. Howey Co. and Howey-in-the-Hills Service, Inc. that sought to determine whether or not a particular land-related deal constituted an “investment contract” under the Securities Act of 1933.]

If certain transactions meet the criteria, then they are deemed “securities” and subject to a raft of regulatory requirements.

Here’s the skinny from the SEC.

DAO investors invested money …

“Money” doesn’t necessarily mean cash. Whilst investors used ether to buy DAO tokens, the ether itself constitutes an “exchange of value”.

… with a reasonable expectation of profit…

The DAO was a for-profit entity that sought to fund projects, targeting a return on its investment. These positive returns constitute “profit” in that it would have increased the value of the DAO tokens.

… derived from the managerial efforts of others.

Given the marketing and active engagement with the community from the DAO founders, investors in the DAO had a reasonable expectation that these individuals would provide management and oversight of the entity.

So, investing money (cryptocurrencies included) in a token with an expectation of profit (dividend or simple value increase) derived from the managerial efforts of other people points to a cryptocurrency being a security, and that it’s required to be regulated as such.

And when the solar flares hit later this year, and your Bitcoin hoard is all wiped out, your only hope is that you might be able to take a casualty loss rather than an investment loss.

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