An Opinion
Background
- Cryptocurrency
- Endowment
- Bitcoin Gold Organization
- Platforms and Services
- Coin Supply
- A Security?
Securities Tests
- Howey Test
- Family Resemblance Test
- Risk Capital Test
Conclusion
Background
The Bitcoin Gold Project is an open-source community-driven project to establish a new cryptocurrency, Bitcoin Gold (BTG), based largely on the model of Bitcoin (BTC) as it existed circa September of 2017.
The Cryptocurrency
BTG has a core difference from BTC in that the “mining” or “Proof of Work” algorithm is changed to one which cannot be run on existing ASIC hardware designed for BTC mining. This means that the network of miners upon which BTG relies is entirely separate from and not in direct competition with the BTC mining network.
BTG also has several secondary differences which enable the new network to exist:
- Replay attack protection (to protect the BTC and BTG networks from cross-attacks)
- Unique (new) addressing (to protect users from BTC/BTG confusion)
- Change in Difficulty Adjustment Algorithm (to enable the new blockchain to function in the GPU mining space.)
None of these changes in Bitcoin Gold make for a fundamental shift in the nature of or utility of the coin as a cryptocurrency; in function and form, it completely resembles Bitcoin and is no more a Security than Bitcoin is.
The Endowment
At the time of launch (November 12, 2017), the project began with a rapid 8000-block closed mining period whose “mining rewards” accrued 100,000 BTG to wallets administered by the six co-founders of the project to establish an Endowment. After this 8000-block period, normal mining commenced, which was open to the general public in the same manner as the Bitcoin mining network. (No additional funds accrue to the Endowment from the operation of the BTG network).
The Bitcoin Gold Organization
The project’s co-founders use funds from the Endowment to finance the creation and ongoing activity of the Bitcoin Gold Organization (BGO), an independent body whose purpose is to support the continuation of the Bitcoin Gold Project and the Community of people interested in the project. All decisions on the use of the Endowment’s funds are made by the Board of the BGO, which initially consisted of the six co-founders of the project. The BGO hires and pays staff to support the Community, for ongoing code development for the project, and for platforms and services that support the Bitcoin Gold Project.
The Platforms and Services
The platforms, services, and code include:
- A project website and forums for information and discussion
- A set of full nodes and DNS seeds distributed across the globe to provide initial network stability (without which the now-established BTG network can continue to function, but which can be maintained to enhance network stability and reliability)
- A blockchain explorer and API for convenient interaction with the BTG blockchain
- Wallet software, pool software, mining software, software “libraries” for developers (all free and open-source on GitHub)
- A “Testnet” infrastructure separate from the production Bitcoin Gold network (“mainnet”) to allow for continued development in safety
These platforms and services are all provided to the public via the internet with unrestricted access to parties public and private at no charge. Neither BTG nor any other payment system or token asset is required to utilize them; in other words, BTG does not serve as a Utility Token. All code produced is published as open-source and can be freely downloaded by the public. Additional wallets, software, and sites for the use of the Community are produced and provided by third parties, sometimes for profit, but these have no affiliation with or explicity endorsement from the BTG Project or the BGO.
The Coin Supply
It is important to note that the great majority of BTG created by the project were never in the control of the BGO and were completely outside of the BGO’s control from the moment of creation. Specifically, the Bitcoin blockchain (along with the 16.5 million BTC that existed within it) was forked (copied) on 24 October, 2017, to create the Bitcoin Gold blockchain, and then new blocks with BTG began being added to that chain when Bitcoin Gold launched mining on 12 November, 2017. None of the 16.5 million BTG existing before that first block on 12 November belonged to or were controlled by the BGO; those 16.5 million coins were entirely in the control of the owners who controlled the corresponding BTC.
On 12 November, 2017, the BGO received 100,000 coins to the Endowment during the one-time bout of closed mining amounting to 0.1 million new BTG, which added to the already-existing supply of 16.5 million globally distributed coins. After the formation of the BGO Endowment, 99.4% of the available coin supply was outside the Endowment.
All proceeds from future mining on the Bitcoin Gold blockchain - that is, the mining rewards and the mining fees - accrue wholly to whoever voluntarily takes part in mining and is is completely open to the public. No fraction or percentage of those funds ever accrue to the BGO or the Endowment, and the future coin supply is never directly owned or controlled by the BGO. The maximum future coin supply for BTG is, like BTC, approximately 21 million coins, so the size of the initial Endowment expressed as a percentage of the total future coin supply is less than 0.476%, and 99.523% of the coin supply originates outside of the BGO’s control. As coins from the Endowment are spent in support of the BGO’s work, the recipients of those coin are free to use them as they see fit, and those spent coins become part of the public coin supply.
A Security?
The existence of the BGO, the Endowment, and the platforms provided by the BGO add some complexity to an assessment of whether BTG is a Security. There are several formal “tests” designed to help answer this question in the United States, and many other countries have similar or corresponding regulatory schemes and tests.
Securities Tests
The Howey Test
The most well-known is the Howey Test, named after the 1946 Supreme Court case SEC v. Howey Co. It’s useful to apply this test as regards BTG as a cryptocurrency and the Bitcoin Gold Organization (BGO) as an entity.
Under the Howey Test, a security or an “investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. 66 S.Ct. at 1103.”
This is typically broken into four prongs to apply it to the purchase of a crypto asset:
- It is an investment of money
- The investment of money is in a common enterprise
- There is an expectation of profits from the investment
- Any profit comes from the efforts of a promoter or third party
If all four of these necessary conditions are met, then an investment in BTG is a Security.
Addressing these:
“2. The investment of money is in a common enterprise”
In a security, the contracts/shares/tokens originate with some company or enterprise, and the funds from the sale of those contracts/shares/tokens are controlled by that company or enterprise.
In contrast, BTG were not and are not sold directly by the BGO, in public sales or private. No proceeds from any sales of BTG were or are received by the BGO. Purchase of BTG on the open market does not confer any rights or control over the BGO or the Endowment. No ownership rights are acquired through the purchase of BTG other than the ownership of the purchased BTG, itself.
Neither the purchase of BTG nor the mining of BTG directs any funds to the BGO or any common enterprise.
Bitcoin Gold (BTG) is therefore not a security.
“3. There is an expectation of profits from the investment”
There is no earned interest, no profit share, no other proceeds stemming from the purchase of BTG.
Bitcoin Gold (BTG) is therefore not a security.
Conclusion: BTG fails to meet the 2nd and 3rd prongs of the Howey Test, and is therefore not a security.
Family Resemblance Test
In 1990, the US Supreme Court created the Family Resemblance Test. This case dealt with whether or not certain Notes can be deemed securities. A note is a contract which specifies some sort of repayment or payment on demand. Some ICOs which feature “redeemability” may be considered Notes and be subject to this test. Bitcoin Gold (BTG) have no such inherent redeemability or repayment features.
The Bitcoin Gold blockchain supports scripting features that support such technologies as multi-sig and time-locked wallets, and can be extended to create “smart contracts” and 2nd-layer networks (such as Lightning Network). These extensions may include redeemability or repayment features which resemble Notes, but those contracts are agreements strictly between the parties to those contracts. In this scheme, a contract between two parties is best considered a Note denominated in BTG, much like a conventional Note denominated in US Dollars or other fiat currency. Here, the BTG resembles the US Dollar, not the Note. Therefore, the Family Resemblance Test for Notes does not apply, and BTG is not a security under this test.
Risk Capital Test
Some jurisdictions, such as US State of California, use what is known as a Risk Capital Test to identify whether something represents a security. This test focuses mainly on the reasons why money or assets are being invested and what risks the investment poses for any investors to determine whether an investment is a security.
This test is most easily understood by example: the most famous case involved the purchase of golf club memberships for a golf club that had not yet been built. People who purchased memberships in advance did not gain an ownership interest in the club, nor did they expect to receive any profits from the operation of the club. However, their investment in a membership and their ability to use that membership were at risk because there was no guarantee that the club would actually be built. In essence, the memberships had been sold to raise capital to fund the creation of the club, much like any other business venture raising capital through a public offering. The courts found that the investment in a membership entailed risk, and that such purchases were investments in securities, and that the sellers of those memberships had to comply with securities laws in their promotion and sales of those memberships.
No purchase of Bitcoin Gold is made with the expectation that those BTG will be needed to access some promised future service offered by the BGO, nor are any sales of BTG used to raise funds for the BGO. Since BTG is not marketed or sold as a way to receive something that may or may not later exist, a buyer of BTG assumes no such risk. Consequently, Bitcoin Gold is not a security under the _Risk Capital Test.
Conclusion
Conclusion
BTG are not a security based on the logic of multiple well-known formal “tests” used to assess this question in multiple jurisdictions.
References