At last count, the U.S. Securities and Exchange Commission (SEC) enforcement arm has singled out at least 68 blockchain tokens as securities. This is the running tally of cryptocurrencies mentioned in the various lawsuits the SEC has brought against crypto companies, promoters, and developers over the years. With “blue chip” tokens, including Solana’s SOL and Cardano’s ADA tokens, on the list alongside dozens of other assets of more or less utility, the SEC essentially says assets are worth more than $100 billion combined (i.e. about 10 % of the total cryptocurrency). market capitalization) are illegally traded.
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Not to mention SEC Chairman Gary Gensler, who has expressed his view that almost all crypto tokens fall under his purview. In addition to bitcoin (BTC). And maybe ether (ETH), the native token of Ethereum. Would it be nice if there was more clarity on the primary asset used by the second largest blockchain by value and the top network by number of active users? Obviously, yes. But despite Gensler’s claims that the rules are clear, there is remarkably little that can be said with certainty about the current status of crypto – at least in the US.
Just take one reasonable question: what can users do with a token labeled “security”? On some level, a word is just a word, and if a blockchain is truly “decentralized enough,” then users should be able to trade its token and use its open source code, whatever the law says. After all, these are stateless networks. So what can a user do with a token that is a security? Everything you could with a token before it was declared a security.
However, this understanding would mean ignoring the fact that many of the world’s crypto users access these networks and buy these assets using centralized exchanges and services. And centralized exchanges and service providers generally have to play by the rules. If users can’t access a token because crypto ramps can’t list it, then discussions of “stateless currencies” and open source access are moot for many people. So what can a user do with a token that is a security? Everything and nothing, subject to the restrictions imposed by the SEC.
Also see: The case of regulating crypto, not banning it | Opinion
According to Marc D’Annunzio, the general counsel of compliance-friendly trading and rewards platform Bakkt, the classification of a token as a security has two main consequences: it affects the disclosures that companies must provide to potential investors and the way a good can be offered. These restrictions may limit the type of platforms that can legally offer an asset, such as registered broker-dealers, stock exchanges and other trading systems, and whether more than “accredited investors” can trade the tokens.
“We don’t believe classification has a drastic impact on the use cases for those tokens,” D’Annunzio said in an email. However, it matters whether companies like Robinhood, Coinbase and eToro want to give access to a token and whether they can do so legally. It is here that it is worth rephrasing the question: Are we moving into a world where sincere citizens in the US cannot act in Cardano’s ADA or Solana’s SOL?
As mentioned, these are two tokens named as securities in the SEC’s recent lawsuits against Coinbase and Binance, and two of the largest tokens that some (but not all) trading platforms decided to delist. Trying to get a hard answer from an attorney about the specific qualifications they used to determine whether to keep or remove a token is like pulling teeth. Solana and Cardano, at least in my opinion, claim to be called decentralized as much as most other blockchains, but SOL and ADA trading may be severely restricted in the US. If this sounds exaggerated , there is an antecedent.
In 2020, the SEC filed a lawsuit against Ripple, the corporate entity arguably most closely associated with the XRP cryptocurrency. The SEC alleged that XRP is a security and that Ripple has been illegally selling over $1 billion worth of tokens. Essentially, the SEC’s argument is that XRP meets the qualifications of the so-called “Howey test,” or one of the standards enacted in the 1930s to determine whether an asset is an “investment contract.” . An asset succeeds (or fails, depending on your POV) if it is an investment of money in a common venture with the expectation of profit from the efforts of others.
That definition often makes it seem like cryptocurrencies are at least like securities. Frankly, most people buy crypto because they expect to make a profit based on the success of a network or application built and maintained by other people. You can’t get around that, even though a token often has other functions (or in the case of non-fungible tokens, the ‘intrinsic value’ of being associated with a work of art).
However, there are many instances where it is clear that a token is being used for more than speculation and there are also many reasons why it would be worth considering the new features of cryptocurrencies that differentiate them from traditional assets such as stocks, bonds and exchange traded funds (i.e. the SEC’s bread and butter). But more on that later.
What’s important here is that after the SEC said XRP is a security, most exchanges in the US removed the token. If you look at CoinMarketCap today, you will see that XRP is still doing well. It is the sixth largest token by market capitalization three years after the SEC first sued Ripple. Although you will find that almost all of the XRP trading volume is on offshore exchanges, except for the pittance that is traded on US-based Kraken.
In a way, this is probably the clearest example of what you could expect if a token turns out to be a security: it probably won’t be accessible to US users, given the current exchange ecosystem, but will be available for anyone to trade around the world with a Bithumb, Bitstamp or KuCoin account (and in the US, if you have a VPN). Astute readers may notice that I have removed Binance – by far the largest US exchange – from that list. That’s not just because it’s currently being sued by the SEC, but to make the next point.
Today, Binance is seeing more XRP trading activity than any other exchange combined (although if the SEC is to be believed, there is also a lot of laundry trading). However, if Binance didn’t exist, that trading activity would just go elsewhere. Blockchains are open and their tokens are always accessible for peer-to-peer trading with the right know-how, so if there is enough demand, someone will always try to find a way to deliver those tokens easily.
I would take it a step further by saying that this is likely to be the case even in the catastrophic scenario where crypto is banned by every country on Earth, which is due to several reasons – including recent regulatory developments in Europe and Hong Kong. and game theory The view that some country would probably want to be the sole regulator of a lucrative industry is not going to happen. A more likely scenario is that some regions are friendly to crypto and others hostile, so crypto will always have a home.
Crypto’s regulatory uncertainties stem in part from the fact that the industry’s major projects involve making technologies universal. Because there is a part of crypto that functions as a limitless natural resource (such as coal to mine or to bend a river), many have argued that the entire industry should not be encumbered by regulatory authorities or treated as raw materials of the earth and must be placed under jurisdiction. of the Commodities and Futures Trading Commission (CFTC). Not everyone agrees.
Also see: Binance and Coinbase: Experts Weigh What’s to Come
For example, Bakkt acquired a broker-dealer entity in early 2023 because it will be “useful for offering those tokens that have been identified as securities,” D’Annunzio said. Several other companies have taken a similar approach, including BitGo and Coinbase. These licenses meet some of the monitoring requirements requested by the SEC, but they are not a complete approach to all of crypto’s regulatory uncertainties. Who exactly should prepare a cryptocurrency’s risk disclosures? In one case, would it be SOL’s validators or the Solana Foundation?
Crypto lawyer Gabriel Shapiro has argued that cryptocurrencies are essentially shares in non-profit companies that are collectively owned (via token holders) and operated by employees (miners or validators). A token is “the closest thing to acquiring equity in a network that nobody owns,” he wrote. However, what totally sets crypto apart from traditional stocks like stocks is that the technology is always open. There may be regulations restricting ramps’ ability to offer trading services, but the networks themselves are super-regulatory.
“The SEC appears to be liberally interpreting the Howey test when it comes to determining which tokens can be securities,” D’Annunzio said. “While these issues may ultimately be resolved through litigation and/or federal law, the SEC’s position is certainly relevant in the current landscape.”
In a sense, the classification of cryptocurrencies as securities affects who can access a token, but not what they can do with it.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.