Why is the crypto industry panicking over the SEC's decision to consider cryptos as securities?

The cryptocurrency industry is in turmoil following the U.S. Securities and Exchange Commission 's (SEC) decision to classify certain tokens as "financial securities." This position could have significant consequences for the cryptocurrency industry, and particularly for exchanges , especially regarding regulation and compliance.

In this article, we will explore the reasons for this panic and the implications for cryptocurrency market participants.

SEC Lawsuits Against Coinbase and Binance

The SEC recently filed lawsuits against cryptocurrency giants Coinbase and Binance , accusing them of securities regulatory violations. The SEC believes that certain cryptocurrencies, including 19 tokens specifically mentioned in the lawsuits, must be registered as securities. Both companies dispute the allegations and are preparing to defend themselves in court.

What is a “security” under US law?

The definition of a security in the United States is based on the Howey Test , which dates back to a 1946 Supreme Court decision. According to this test, an investment is considered a security if it meets four criteria: an investment of money, in a joint venture, with an expectation of profit derived primarily from the efforts of others. The SEC argues that the tokens in question meet these criteria.

According to the Howey Test, a financial transaction is an investment contract if the criteria below are met:

• The transaction is a payment
• There is an expected profit
• Investing is a joint enterprise
• The profit is the result of various promotions of the issuing company

? In the strict definition of a financial security, it is a property right. It represents an acknowledgment that a person or organization owns a portion of the company's capital or a portion of a company's debt. There are several forms of financial security: a stock, a bond, a debt security, or a collective investment undertaking (OCI).

What tokens are classified as “securities” by the SEC?

• Cosmos (ATOM), Binance Coin (BNB), Binance USD (BUSD), Dash (DASH), COTI (COTI), Chiliz (CHZ), Near (NEAR), Flow (FLOW), Internet computer (ICP), Voyager Token (VGX), Nexo (NEXO).
• Among the most popular cryptocurrencies, we find Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS).

It is important to know that most, if not all, cryptocurrencies that are classified as “securities” operate using the “Proof-of-stake” mechanism.

For the moment, the case of Ethereum (ETH) is still in a legal limbo and the token is not among the cryptocurrencies considered as "securities".

Similarly, Bitcoin is considered a commodity and is not part of this list, much to the delight of bitcoin maximalists.

Gary Gensler, chairman of the SEC since 2021, told New York Magazine, “You can find a website, you can find a group of entrepreneurs, they could create their legal entities in an offshore tax haven, they could create a foundation (…). In other words, there are people behind these cryptocurrencies who use a variety of complex and legally opaque mechanisms, but at the most basic level, they are trying to promote their tokens and attract investors.”

By this logic, Bitcoin is fundamentally different from other crypto projects.

—>Read the article: What makes bitcoin a monetary value?

The debate around the classification of cryptocurrencies as securities

Proponents of regulating cryptocurrencies as securities believe this would better protect investors and ensure greater market transparency. Indeed, as Gary Gensler pointed out, the cryptocurrency industry is a wild market that needs regulation to reduce and limit the numerous scams and abuses.

However, opponents of this approach, notably cryptocurrency exchange platforms, argue that the existing rules are not adapted to the decentralized world of cryptocurrencies and that they should instead be considered as materials first…

More recently, banks and asset management firms have taken a keen interest in Bitcoin, as evidenced by BlackRock 's request to create a Bitcoin ETF . This indicates that new financial instruments linked to Bitcoin will likely be created, which will then necessitate new regulations.

The potential consequences of classifying tokens as securities

If the tokens mentioned in the SEC lawsuits are ultimately classified as securities, they would have to be removed from US exchanges and their trading would be severely restricted.

This could set a worrying precedent and pose significant regulatory challenges for the cryptocurrency industry, particularly for developers and token holders.

The cryptocurrency industry has expressed its displeasure with the SEC's stance and called for regulatory clarification. Industry firms believe the SEC has been vague and inconsistent in its determination of what constitutes a security and has not been helpful to market participants seeking guidance.

The position of international regulators on the issue

In other countries and regions, regulators have taken different approaches to determining whether cryptocurrencies should be treated as securities.

For example, in the United Kingdom, the law regulates digital assets considered as investments with rights to redemption or profit sharing, while "payment tokens" like Bitcoin and "utility tokens" that provide access to a service are not regulated. This is an even more flexible policy than that found in Europe with the MiCA regulation.

What are the implications for investors and companies in the sector?

Regulatory uncertainty surrounding cryptocurrencies as securities could have significant consequences for investors and companies in the sector.

Investors could face trading restrictions and potential losses, while companies could be subject to stricter regulatory requirements and harsher tax policies. Furthermore, investors could face increased scrutiny from financial authorities, which would undermine the anonymity and privacy often associated with cryptocurrency transactions.

The repercussions for innovation and competitiveness would also be significant. Cryptocurrency projects will now have to comply with a strict set of rules, which could limit their ability to experiment with new ideas and scale rapidly. Some experts fear this could push cryptocurrency projects to leave the United States for jurisdictions considered crypto-friendly from a regulatory standpoint. This could harm the US's competitiveness in the cryptocurrency sector.

Faced with the current situation, the cryptocurrency industry is calling for modernized regulations adapted to the specificities of cryptocurrencies. Market participants believe that current laws must evolve so as not to stifle innovation while protecting the interests of investors.

Final word

The SEC's decision to classify certain cryptocurrencies as securities has sparked a wave of concern in the industry. As the ongoing lawsuits against Coinbase and Binance continue, market participants are anxiously awaiting the outcomes and potential implications for the sector. Clearly, the stakes are high, and the need for clear regulation tailored to the rapidly evolving cryptocurrency market has never been more pressing.

See also:

• Gary Gensler: The crypto industry is a wild west that must be regulated
• The new MiCA regulation: what’s changing
• I love you, me neither: Why are banks interested in Bitcoin today?

—–

Note: This is not investment advice. Always do your own research. All investments involve risks.

To buy cryptocurrencies :

• Speaking on Binance (Complete crypto trading platform)

Generate interest on your cryptocurrencies:

• Speaking on Youhodler (Earn up to 12% interest)

To secure your cryptocurrencies:

• On the wallet Ledger 
• On the wallet safepal

For fun and games :

• The best for Esport and sports betting: CloudBet