Is cryptocurrency a security? – Forbes Advisor

The Securities and Exchange Commission (SEC) and other US market regulators are getting serious about reigning in the crypto market.

But there is one big unsettled question that is central to their goal: Is cryptocurrency a security?

The last half of the crypto portmanteau contradicts the dilemma: currencya deliberate choice by the founders of the movement, which underscores their ambition to replace fiat currencies as both a store of value and a medium of exchange.

It’s fair to say that since Bitcoin (BTC) launched in January 2009, crypto has become the “Wild West” of financial markets. In the past, its decentralized nature kept it from the prying eyes of governments and other regulatory bodies.

Crypto’s lack of oversight is what is so compelling to many enthusiasts. But with few regulations in place, the doors are wide open for nefarious actors preying on naive investors.

The May crash of stablecoin TerraUSD wiped out more than $600 billion in value and caused a rash of insolvencies — not to mention deepening the crypto winter. The Biden administration responded by outlining a framework for crypto development that includes nods toward crypto regulation.

Let’s take a look at the state of crypto regulation – and see if we get clarity on whether or not crypto is a security

The SEC’s Gensler believes that cryptocurrencies are securities

SEC Chairman Gary Gensler is on record voicing his displeasure with the current state of crypto regulation

Gensler famously said in June that crypto exchanges that don’t cooperate with the SEC are “operating outside the law” and could be at risk of enforcement.

At the heart of Gensler’s pitch to make the SEC the sheriff of crypto is the argument that cryptocurrencies are securities.

But what are securities, really? The Securities Act of 1933 and the Securities Exchange Act of 1934 both spell out the definition of a security in painful detail. But a more useful guide can be found in the Howey test.

The Howey test comes from a 1946 Supreme Court decision in SEC v. WJ Howey Co., which has been upheld in the courts several times. Under the Howey test, a transaction is considered a security if it meets the following four criteria:

• Money is invested.
• There is an expectation that the investor will make money.
• The investment is in a joint venture.
• Profit is generated through the efforts of others.

“Promoters market, and the investing public buys most of these tokens, claiming or expecting profits based on the efforts of others,” Gensler said in a Sept. 8 statement.

In a recent appearance on CNBC, he reiterated his case for crypto. “The law is clear. I think based on the facts and circumstances most of these tokens are securities,” he said.

And that means these cryptos must be registered with the SEC under federal securities laws.

The SEC has cracked down on crypto

The SEC announced in May that it nearly doubled its Crypto Assets and Cyber ​​Unit in May. Since then, the SEC, the Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ) have become more active with crypto enforcement. Take a look at some of the laundry list of costs:

• On September 19, the SEC charged crypto influencer Ian Balina with failing to disclose compensation he received for promoting an unregistered sale of Sparkster crypto assets.
• On September 22, the CFTC settled charges against bZeroX and its founders for violating the Commodity Exchange Act (CEA) and CFTC regulations.
• On September 28, the SEC charged The Hydrogen Technology Corp. and its former CEO for unregistered sales and price manipulation of securities in cryptoassets.

Bloomberg reported that the SEC was investigating popular crypto exchange Coinbase (COIN) for allowing users to trade unregistered securities. The SEC also filed an insider trading complaint against a former Coinbase product manager and identified nine cryptocurrencies as securities, and Coinbase insists it does not list securities.

Two additional cases have been particularly high-profile in the latest wave of regulatory crypto enforcement actions.

Kim Kardashian’s SEC Fine

In early October, reality TV star and social media influencer Kim Kardashian agreed to pay a $1.2 million settlement to the SEC related to allegations that she failed to disclose compensation she received for promoting crypto asset EthereumMax on Instagram in June 2021. The SEC fine was over. four times more than what she earned on promotion.

Based on the penalty handed out to Kardashian, the SEC may be more interested in the visibility of its crypto crackdowns.

Ripple and the SEC

The other major ongoing cryptocurrency regulatory battle is in the courtroom between the SEC and Ripple (XRP) over the sale of the cryptocurrency XRP.

The SEC has filed charges against Ripple, alleging that the company’s sales of XRP constitute illegal securities offerings and that “they raised over $1.3 billion through an unregistered ongoing securities offering.”

Ripple counters the charge, arguing that XRP is a virtual currency, not an investment contract, and therefore not subject to the SEC’s securities laws.

Gordon Allott, CEO of BroadPeak Partners, says the Ripple case should be settled soon and it’s an uphill battle to take on the SEC. “What you do with your crypto can turn it into a security. If you use crypto issuance to fund your business, it will get the SEC’s attention.”

Crypto and the Companies Act

Attorney William Powers, a partner at Nossaman, said the Stop Trading on Congressional Knowledge Act of 2012, otherwise known as the 2012 STOCK Act, could give crypto investors insight into where Congress stands on the issue.

The Securities Act of 2012 requires all members of Congress to publish transactions of “stocks, bonds, commodity futures and other forms of securities” within 45 days on their websites.

The U.S. House and U.S. Senate’s ethics guidance explicitly calls on members of Congress to disclose cryptocurrency transactions, apparently implying that they are classified under the Securities and Exchange Act as “other forms of securities.”

Several members of Congress have subsequently disclosed their crypto dealings.

Those disclosures show there “seems to be consensus” that cryptocurrencies are considered a type of security covered by the Securities Act, at least when it comes to trading by members of Congress, Powers said.

Future SEC regulations for crypto

Currently, the future of US crypto regulation is up in the air as regulators continue to examine the market and determine the best path forward.

The US Treasury Dept. is expected to complete an “illegal finance risk assessment” on decentralized finance (DeFi) and non-fungible tokens (NFTs) in early 2023. In the meantime, Gensler has asked SEC staff to “fine-tune compliance for crypto-security tokens.”

But more regulation may not necessarily be bad for crypto investors, some experts say.

“Having cryptocurrency regulations in place will mean that projects, exchanges and all cryptocurrency-related businesses are held to a higher standard, and as such are beneficial to investors. In addition, it protects investors’ interests, and allows for legal complaints against crypto fraud and projects that violate these rules, says Bobby Ong, co-founder and CEO of CoinGecko.

But Jeremy Wagner, financial analyst at Trading Pedia, says crypto regulation will also cost crypto enthusiasts. “More regulation could also lead to more restrictions on how cryptocurrencies can be bought, sold and used. In addition, more regulations could make it more difficult for innovative new projects to launch in the cryptocurrency space.”