The Debate Over Cryptocurrencies: Are They Securities?
In recent news, several major crypto exchanges have been sued by the U.S. Securities and Exchange Commission (SEC) for trading “securities” without a license. This has led to confusion and uncertainty in the market. In this article, we will discuss the concept of securities and explore whether cryptocurrencies can be classified as securities.
What is an Effect?
In the financial world, an “effect” refers to financially tradable products, such as shares, bonds, mutual funds, options, futures, and ETFs. These products can be bought and sold on exchanges with the expectation of making a profit. Securities play a vital role in the growth of companies as they provide a significant source of income.
In the United States, offering trading in securities requires a license from the SEC. However, there has been an ongoing debate regarding whether cryptocurrencies should be considered securities and fall under the supervision of the SEC.
Are Cryptocurrencies Securities?
The SEC has classified a large group of crypto coins, including BNB, BUSD, SOL, ADA, MATIC, ATOM, SAND, MANA, AXS, and COTI, as securities. This classification has resulted in a significant decrease in the value of these tokens. However, it is important to note that the final decision on whether these tokens are indeed subject to U.S. securities laws is yet to be determined by the judge overseeing the lawsuits.
The determination of whether something is considered a security often relies on the Howey test, which consists of four criteria: investment of money, joint venture, expectations of profit, and profit primarily derived from the efforts of others. If all four factors are met, the item in question may be classified as a security under U.S. law.
There are arguments against the classification of cryptocurrencies as securities. One argument suggests that the Howey test is outdated for cryptocurrencies and that they should be seen as a new asset class. Additionally, the level of decentralization has been mentioned as a crucial factor in determining whether a cryptocurrency should be considered a security.
In contrast, the Commodity and Futures Exchange Commission (CFTC), another major financial regulator in the U.S., considers certain cryptocurrencies as commodities rather than securities. This classification would place these digital coins under the supervision of the CFTC instead of the SEC.
Furthermore, the practicality of using cryptocurrencies as a means of payment and their potential for financial inclusivity is often highlighted as a counterargument against classifying them as securities. Unlike traditional securities like shares, cryptocurrencies can serve as a solution for facilitating transactions.
Contradiction in the SEC
The SEC’s stance on cryptocurrencies has been inconsistent, leading to contradictions and confusion. Former SEC director William Hinman stated in 2018 that Ethereum is not a security. This statement is now being used as evidence in lawsuits against Ripple. However, the degree of decentralization remains a significant factor in determining the classification of cryptocurrencies.
Current SEC chairman Gary Gensler, despite his previous statements suggesting certain cryptocurrencies are not securities, has been hesitant to provide clarification. This lack of clarity from the SEC has created uncertainty and a negative perception of the regulatory body. Clear regulations for the crypto industry are urgently needed, but it may take some time before they are established.
As the SEC continues its legal battles with crypto exchanges and clarifies its stance on the classification of cryptocurrencies, the debate over whether they should be considered securities or commodities remains ongoing. The outcome of these lawsuits and the development of clear regulations will greatly impact the future of the crypto industry and its relationship with governmental authorities.