In the past 50 years, international finance has never had such a topic as controversial as cryptocurrency assets. On one hand, Jamie Dimon, the CEO of JP Morgan Chase, has called bitcoin a “fraud”; Warren Buffet declared that he was bearish in cryptocurrencies and would never buy bitcoin. On the other hand, Bitcoin futures have been available for trading at the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) since December 2017; Goldman Sachs recently started setting up the cryptocurrency trading desk; various Exchange Traded Funds (ETFs), index funds for cryptocurrency assets, and options have also been discussed. 

We can base our framework of valuing cryptocurrency assets upon discussions among an interdisciplinary group of cryptocurrency enthusiasts, developers, entrepreneurs, researchers, and investors. 

At a high level, the legal and regulatory landscape is very complicated around digital assets. The most prominent US regulatory agencies are all clamoring for jurisdiction over crypto assets and have four different views. 

1. Currency 

i. US treasury FinCEN first came out in 2013 and said convertible digital assets would be treated like a currency.

2. Commodity  

i. The U.S. Commodity Futures Trading Commission (CFTC) recognizes bitcoin as a commodity and a subject to Commodity Exchange Act (CEA) and CFTC Regulations. Bitcoin futures are available for trading at CBOT and CME.  

ii. CME launched two Ethereum Indexes in May 2018.  

3. Security  

i. The US Securities Exchange Commission (SEC) states on its website that “ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.”

ii. It is also pointed out that “merely calling a token a ‘utility’ token or structuring it to provide some utility does not prevent the token from being a security.”

iii. William Hinman, the director of the Division of Corporate Finance at the Securities and Exchange Commission (SEC), recently noted that bitcoin and Ether aren’t going to be classified as securities.

4. Property  

i. The Internal Revenue Service (IRS) treats cryptocurrency as property: “Virtual currency transactions are taxable by law just like transactions in any other property.”

In addition, law enforcement and various states in the U.S have their own views of blockchain and cryptocurrencies that can act as other stakeholders. U.S. District Judge Jack Weinstein in Brooklyn ruled that virtual currencies like bitcoin can be regulated as commodities by the US CFTC. 

Wyoming Governor Matt Mead signed legislation in March that makes limited liability corporation laws friendlier to blockchain companies, enshrines “open blockchain tokens”—also known as “utility tokens,” a type of digital currency that can be redeemed for goods and services—as an asset class, and exempts cryptocurrency, taxed by the IRS as physical property, from state property taxes.  As you can see, cryptocurrencies’ functionality today is controversial and still up in the air.  

 

Coinbase gets the greenlight to sell security tokens or did it? 

According to a Bloomberg report, on July 16, 2018, Coinbase made a statement saying they were given the greenlight from SEC to sell security tokens. The following day Coinbase said it never actually received such approval from the SEC. 

Although Coinbase was apparently approved to buy Keystone Capital Corp. with plans to become a broker dealer, Coinbase has clarified that it did not technically receive SEC approval for all three purchases, as was initially reported. “’It is not correct to say that the SEC and FINRA approved Coinbase’s purchase of Keystone because SEC was not involved in the approval process,’ Coinbase spokeswoman Rachael Horwitz said in an email Tuesday.”

So for now, Coinbase knows it has a long way to go before it can sell tokens deemed as securities, but at the very least, things seem to be moving forward in that regard. 

Intrinsic Value via Pexels