The Securities and Exchange Commission’s latest determinations have definitively categorized specific cryptocurrencies as securities, a decision that carries significant consequences for stakeholders in the investment, exchange, and wider industry realms.
The SEC’s View on Cryptocurrencies and Securities
According to the Securities and Exchange Commission (SEC), numerous digital tokens qualify as securities, based on rules derived from the Securities Act of 1933 and expounded upon in significant legal cases.
The crucial SEC v. W. J. Howey Co. case established the “Howey Test” parameters to assess if a transaction meets the definition of an investment contract, which is a type of security. The Howey Test takes into consideration whether the transaction entails an investment in a shared enterprise, with the expectation of primarily gaining profits from the efforts of others.
The Securities and Exchange Commission (SEC) has highlighted that a number of tokens meet the criteria for securities, and thus, must comply with existing securities regulations in the cryptocurrency market.
The Securities and Exchange Commission (SEC) has taken a significant step by defining certain cryptocurrencies as securities. This list of crypto securities includes:
- XRP (XRP)
- Telegram Gram Token (TON)
- LBRY Credits (LBC)
- Decentraland (MANA)
- DASH (DASH)
- Power Ledger (POWR)
- OmiseGo (OMG)
- Algorand (ALGO)
- Naga (NGC)
- TokenCard (TKN)
- IHT Real Estate (IHT)
- Kik (KIN)
- Salt Lending (SALT)
- Beaxy Token (BXY)
- DragonChain (DRGN)
- Tron (TRX)
- BitTorrent (BTT)
- Terra USD (UST)
- Luna (LUNA)
- Mirror Protocol mAssets (Multiple Symbols)
- Mirror Protocol (MIR)
- Mango (MNGO)
- Ducat (DUCAT)
- Locke (LOCKE)
- EthereumMax (EMAX)
- Hydro (HYDRO)
- BitConnect (BCC)
- Meta 1 Coin (META1)
- Rally (RLY)
- DerivaDAO (DDX)
- XYO Network (XYO)
- Rari (RGT)
- Liechtenstein Cryptoasset Exchange (LCX)
- DFX Finance (DFX)
- Kromatica (KROM)
- FlexaCoin (AMP)
- Filecoin (FIL)
Filecoin’s addition to the list of cryptocurrencies approved for trading by the Securities and Exchange Commission (SEC) caused a lot of disagreements, mainly because it is widely traded on several US-based exchanges, and had previously intended to form a trust in partnership with Grayscale Investments. The SEC’s unexpected conclusion led to the abandonment of the trust plan, and stakeholders were left to deal with the consequences.
“Grayscale does not believe that FIL is a security under the federal securities laws and intends to respond promptly to the SEC staff with an explanation of the legal basis for Grayscale’s position,” the company said.
Understanding the Consequences of Trading Crypto Securities
Selling securities that are not registered is considered a violation of US law. The Securities and Exchange Commission (SEC) requires securities to be registered before they can be sold to the public. Although there are some exceptions, such as sales to accredited investors or private placements, selling unregistered securities can result in significant penalties, including fines and profit disgorgement.
Following the SEC’s new classification, exchanges that list these tokens may face legal scrutiny. Some US exchanges currently list more than a dozen cryptocurrencies that the SEC considers illegal to sell. This could trigger regulatory actions that could affect their operations.
Investing in these newly classified securities has become more complex for investors due to the regulatory compliance required for securities trading. Investors must consider factors such as securities laws and regulations. Additionally, the marketability and liquidity of these tokens could be affected by their new legal status.
If exchanges delist these tokens to avoid potential regulatory penalties, investors may find that trading opportunities for these tokens become limited. This could reduce the liquidity of these tokens, making them more difficult to buy or sell in the market.
Crypto exchanges that list these securities face their own set of challenges. They risk sanctions and legal repercussions if they continue to list these securities without the necessary registration or exemptions.
The Importance of Legal Advice in Mitigating Risks
In light of the legal complexities surrounding the sale of unregistered securities and the exemptions that may apply, seeking professional legal advice has become crucial for all stakeholders in this space. Investors, project creators, and especially crypto exchanges must have a nuanced understanding of the regulatory environment to navigate these evolving dynamics successfully.
Critics argue that the SEC’s recent enforcement actions and interpretive decisions could stifle innovation in the blockchain and crypto industry. “Regulation by enforcement doesn’t work. It encourages companies to operate offshore, which is what happened with FTX,” said Coinbase CEO Brian Armstrong.
Blockchain projects often raise funds through initial coin offerings (ICOs), which would be considered securities offerings under the SEC’s interpretation. Therefore, these projects must comply with strict regulatory requirements, which can be cumbersome and expensive, discouraging smaller innovative projects.
The SEC’s approach may cause some activities to move to more lenient jurisdictions. However, given the global nature of cryptocurrencies, US investors could still be indirectly affected. For example, a project may block US investors from participating in an ICO to avoid the reach of US securities laws. This could limit US investors’ opportunities to participate in innovative blockchain projects.
Crypto Securities: Looking Ahead
The SEC’s recent classification of certain cryptocurrencies as securities marks a significant change in the regulatory environment. The effects of these decisions are expected to be far-reaching, impacting not only the specific tokens in question but also the broader crypto industry.
Reclassifying these cryptocurrencies as securities could result in reduced liquidity, limited market access, and potential legal consequences for trading unregistered securities. This presents challenges for individual investors and exchanges and could also stifle innovation within the industry.
The full impact of the SEC’s decisions will depend on several factors, including the legal strategies adopted by affected parties, potential changes in the regulatory environment, and the market’s response.
The intersection of cryptocurrencies and securities laws highlights the importance of understanding the regulatory landscape in which digital assets operate. Although the recent SEC rulings have added complexity, they reinforce the need for regulatory clarity in this rapidly evolving field.
By seeking professional legal advice and taking a proactive approach, stakeholders can address the challenges posed by these developments and continue to participate in the dynamic crypto market.