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Let’s Remind Charles Hoskinson of Why Bitcoin Isn’t a Security

This debate is settled for Bitcoin, Charles. Quit spreading FUD. 


Last Saturday, Cardano founder Charles Hoskinson had some spicy predictions regarding the crypto regulatory situation in the United States.

His first was that Ripple’s long-standing lawsuit with the Securities and Exchange Commission (SEC) could settle as soon as December 15th. That didn’t happen. 

His second was that Bitcoin (BTC) might be regulated by the agency as a security if Cardano (ADA) were to be labeled as such. That won’t happen.

This is, in my view, another dishonest attempt by Hoskinson to pretend there’s no meaningful distinction between how Bitcoin and Cardano operate – nor how they were created. 

In reality, there’s plenty of reason to believe that Bitcoin will never be labeled a security, whereas ADA probably will be. Based on the tone of regulators as of late, it seems that’s already happening. 

Let’s break it down: 

What is a Security?

In the US, securities are defined by the Howey Test – a nearly century-old legal precedent for determining what constitutes an investment contract. 

To pass the test – and obtain the security label – a given asset must involve:

  1. an investment of money…
  2. …in a common enterprise…
  3. …with an expectation of profits…
  4. …to be derived from the efforts of others.

That’s it. That’s the test. 

As you can see, it’s not that complex. The criteria are simple. No mention of “utility,” or “decentralization,” or “blockchains” whatsoever. 

As an example, here’s Gary Gensler, the current SEC chairman, explaining how these criteria apply to Ether – the second-largest cryptocurrency. 

Keep this in mind as we review BTC and ADA based on the truly relevant metrics. 

ADA is an Investment; BTC is Not

When first launched, purchases of ADA easily qualified as an investment of money. 

During the asset’s initial coin offering (ICO) from 2015 to 2017, ADA was sold by Hoskinson’s company, Input Output Hong Kong (IOHK) at a fixed price of $0.0024 USD per ADA. 

Like many other blockchains, a significant percentage of the total supply was allocated to venture capitalists and other insiders. Altogether, this satisfies the first point of the Howey Test.

By contrast, Bitcoin was never distributed in an ICO or presale. Rather, network participants were free to mine every new coin from the network’s launch on January 8th 2009. 

They were given ample time to prepare their systems for mining by the program’s anonymous founder. As such, there were no privileged entities or insiders to unfairly benefit from this scheme, nor was there an “investment of money” of any sort. 

In fact, Bitcoin didn’t even have a market price until late 2009, when Finnish developer Martti Malmi traded 5,050 BTC for just $5.02.

Cardano Has a Development Team; Bitcoin Does Not

The future direction of Cardano’s development is largely under the control of Input Output Global (IOG) and the Cardano Foundation. 

Many regard the former’s CEO, Charles Hoskinson, as the face of the protocol. That said, when his followers get mad at him and his company for shoving through certain upgrades, he pulls likes to pull the “decentralization” card.

Input Output used the ADA ICO to fundraise $62 million worth of Bitcoin for Cardano’s development. Therefore, investors effectively invested in a “common enterprise” in return for ADA, in the form of IOHK. 

This checks off the second and fourth points of the Howey test. Not only is there a common enterprise, but that enterprise is responsible for the “efforts” in developing the protocol that investors have backed with their money. 

Not the case with Bitcoin: no single developer or group has the power to change the software. The one man who could have wielded that influence – Satoshi Nakamoto – vanished in 2011, and worked on Bitcoin for free until that time. 

With no leader at the helm, Bitcoin upgrades in a sluggish, slow, and chaotic fashion – something Hoskinson has previously criticized the protocol for. In reality, this is how a truly decentralized digital commodity operates, as there is no single group responsible for building it on everyone else’s behalf. 

ADA Has a Profit Expectation; Bitcoin Does Not

Charles Hoskinson often criticizes Bitcoin for its (supposedly) dirty, nasty, not-green energy consumption. He’s even suggested that it could get banned from the United States on this premise. 

Cardano, he claims, doesn’t run this risk because of its energy-efficient proof of stake consensus mechanism. However, it may be this exact mechanism that spurs the SEC to crack down on ADA as an unregistered security. 

Proof of stake allows ADA holders to “stake” their holdings to passively earn even more ADA. As chairman Gensler recently explained, this happens to make cryptocurrencies even more security-like.

“From the coin’s perspective, that’s another indice that under the Howie Test, the investing public is anticipating profits based on the efforts of others,” he said after a congressional hearing in September.

An expectation of profits? That’s point three of the Howey Test. 

Not convinced? Here’s Cynthia Lummis – a U.S. senator closely involved with drafting crypto legislation – discussing Ether’s legal status. While she once thought the asset was a commodity, she now believes it’s a security precisely because it adopted proof of stake.
(Skip to 3:33)

With Bitcoin, BTC holders don’t get to earn more BTC just by sitting around. Only miners, who spend energy, may profit from either newly generated Bitcoin or the network’s transaction fees. 

While some investors may purchase BTC expecting a profit in the future, this will solely be due to the asset’s core value rising on the market. This is no different from established commodities like gold or wheat appreciating in market value. 

The Bottom Line

Ultimately, this debate is settled in Washington. Gensler, Lummis, and the Commodities and Futures Trading Commission (CFTC) chairman Rostin Benham all agree that Bitcoin is a crypto commodity – and possibly the only one

Other cryptos, especially proof of stake coins, are on notice. Hoskinson ought to be as well. 

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Don’t fall for Hoskinson’s concern-trolling over Bitcoin’s energy footprint or regulatory status. Holders of his own coin, ADA, have much more to worry about.

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