Why the Crypto World Flips When the SEC Calls Coinage Securities
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Crypto traders have been given notice that the US Securities and Exchange Commission considers a range of widely traded digital assets to be securities, a situation that could impose regulatory requirements that many boosters say could be crippling. But figuring out what makes a coin a security or not is a complex question.
1. What is the SEC doing?
Its president, Gary Gensler, and his Trump-era predecessor, Jay Clayton, have said that many digital assets have identifiable securities. Gensler warned over the past year that the agency was planning to take tougher measures to enforce its rules on those tokens. Concerns among crypto traders grew when the markets regulator took the unusual step in late July to identify nine crypto assets that were treated as securities as part of an insider trading case. Seven of them were traded on Coinbase, the largest crypto trading platform in the US. Separately, Bloomberg News reported that Coinbase is facing scrutiny by the SEC over whether it has listed assets for trading that should have been registered with the agency.
2. What does it mean to have security for something?
In its simplest form, whether something is a security under US regulations is basically a question of how much money it raises, like shares issued by a company. To make that determination, the SEC applies a legal test, which comes from a 1946 U.S. Supreme Court decision. Under that framework, an asset may be subject to the SEC when it involves investors investing money with the intention of profiting from the organization’s leadership efforts. In December 2020, the agency acquired Ripple Labs Inc. for allegedly raising funds by selling the XRP digital token, the third largest at the time, without registering it as a security. The SEC claimed that the company was funding its growth by issuing XRP to investors, betting that its value would increase. The matter is now a major legal battle and Ripple has appointed a former SEC chair, Mary Jo White, as an advocate.
3. Why is calling token a matter of security?
For starters, such designations would make a cryptocurrency exchange more expensive and complicated. Under US regulations, the label meets strict investor-protection requirements for platforms and issuers. This burden would put smaller platforms at a disadvantage compared to competitors with deep pockets. What’s more, exchanges will face constant scrutiny by regulators, which can lead to fines, fines and, in the worst case, prosecution if criminal authorities ever get involved. It could also mean losing future funding from investors who could avoid those increased compliance burdens and regulatory scrutiny. Proponents of greater regulation believe that securities designations will result in greater information and transparency for investors due to the SEC disclosure requirements that will apply.
4. Who is against that view?
Crypto enthusiasts say their enterprises are decentralized in a way that makes the old rules a bad fit, and crypto trading platforms argue that the assets they are listing should be considered commodities, not securities. In the US, the regulations governing commodity trading and their derivatives focus more on ensuring that companies, producers and farmers are protected against the risks of price volatility in commodities than on the role of small-time investors. can use derivatives effectively.
5. What does the crypto community want?
Efforts have been made to give the Commodity Futures Trading Commission on Capitol Hill, the US derivatives watchdog, more power to directly regulate crypto assets. It currently primarily oversees crypto futures and has the ability to take enforcement action if fraud or manipulation occurs in the underlying market. Crypto proponents argue that the CFTC, which has brought in dozens of crypto enforcement actions, is in a better position than the SEC to regulate the asset class. Opponents of that approach say the SEC’s securities-focused regulations provide more protection for mom-and-pop investors.
6. How do agencies split crypto?
To some extent, their perspectives reflect their origins. The SEC was formed in the wake of the market crash of 1929 and sees its main mission as protecting investors by requiring abundant disclosures by financial institutions. The CFTC traces its roots to the Department of Agriculture and helps farmers survive drought. The CFTC – and US regulations around commodities and their financial derivatives – are widely seen as a less difficult regulatory regime. So it should come as no surprise that the crypto crowd wants the CFTC to be their regulator and not the SEC.
7. Which coins are considered security or not?
The short answer is that there is a lot of ambiguity beyond the biggest cryptocurrency. US regulators, including the SEC, agree that bitcoin, the largest digital asset ever, is not a security. It was started by an unknown person or persons going by the pseudonym Satoshi Nakamoto and does not exist as a way to raise funds for a specific project. Ether, the second largest token, was not considered a security during the Trump administration by a senior SEC official, who indicated that ether had begun to qualify as a security – the Ethereum Foundation used it to raise funds. Did for – it had grown into something decentralized enough that it probably wasn’t one anymore. The CFTC followed suit in considering it a commodity, and the CME listed futures on bitcoin as well.
Gensler said that if the agency works with the agency to register, the agency could waive some of its rules to be better suited to digital assets, while also ensuring investor protection. However, he has not provided any road map of how exactly this can be accomplished. Meanwhile, lawmakers are weighing several proposals that could give the CFTC and US banking regulators more power over certain parts of the asset class. At the same time, the SEC’s insider trading case, if it comes to testing, could also result in a clearer picture of what types of tokens qualify as securities and which should be considered commodities. In March, President Joe Biden signed an executive order asking agencies across the government to coordinate what has hitherto been a scatter-shot approach to the asset class.
8. Is this an issue elsewhere?
Yes. Globally, various regulators have taken a variety of stances on whether or not cryptocurrencies are considered securities. The UK’s Financial Conduct Agency regulates digital assets, which consider investments that come with repayment rights or a share in profits, while “payment tokens” such as bitcoin or “utility tokens” that provide access to a service. Do, are irregular. Singapore regulates both types but under different laws. It considers coins that are a digital representation of other assets, such as unlisted shares, as securities. In June, the European Union reached a tentative agreement to implement common cryptocurrency regulations in all 27 member states and to develop a new legal framework to regulate public offerings of cryptocurrencies.
• A look at the pressure of the crypto industry in Washington to avoid securities regulation.
• Gary Gensler’s first interview on crypto since taking over as SEC Chairman with Bloomberg Businessweek.
• The 2018 Bloomberg QuickTake shows how long these fights have been going on.
• Executive Order on Crypto Regulation signed by Biden.
• An article on the SEC’s battle with Ripple.
• The UK FCA’s breakdown of regulated versus unregulated tokens.
More news like this is available on bloomberg.com