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

The cryptocurrency industry is in turmoil over the decision of the Securities and Exchange Commission (SEC) to classify certain tokens as “financial securities,” or “securities.” This position could have significant implications for the cryptocurrency industry, and more specifically for exchange platforms, particularly in terms of 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 considers certain cryptocurrencies, including 19 tokens specifically mentioned in the lawsuits, to be registered as securities. Both companies dispute the accusations 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. Under this test, an investment is considered a security if it meets four criteria: an investment of money, in a joint enterprise, with an expectation of profit from mainly the efforts of others. The SEC maintains that the affected tokens 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 a recognition 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 share, a bond, a debt security or a UCI (Collective Investment Organization) for example.

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".

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

Gary Gensler, chairman of the SEC since 2021 told the New York Magazine “You can find a website, you can find a group of entrepreneurs, they could set up their legal entities in an offshore tax haven, they could set up 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: How does bitcoin have monetary value?

The debate around the classification of cryptocurrencies as securities

Supporters of regulating cryptocurrencies as securities believe this would better protect investors and provide greater transparency in the market. Indeed, as recalled Gary Gensler, the cryptocurrency industry is a far west which must be regulated to reduce and limit the multiple 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 companies are keenly interested in Bitcoin as evidenced by the request for BlackRock to create a Bitcoin ETFs. This shows that new financial instruments linked to Bitcoin will likely be created, implying new regulations…

The potential consequences of classifying tokens as securities

If the tokens mentioned in the SEC lawsuits are ultimately classified as securities, they should be removed from the exchange platforms American countries and their trade would be severely limited.

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 UK, the law regulates digital assets that are considered investments with redemption or profit-sharing rights, 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 regulations.

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 tougher tax policies. In addition, investors could be subject to greater monitoring by financial authorities, which would call into question theanonymity and policy often associated with cryptocurrency transactions.

The repercussions on innovation and competitiveness would also be significant. Cryptocurrency projects will now have to adhere to a strict set of rules, which could limit their ability to experiment with new ideas and scale quickly. Some experts fear this could push cryptocurrency projects out of the United States for jurisdictions qualified as crypto-friendly on the regulatory level. This could harm the competitiveness of the USA 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 caused a wave of concern in the industry. While the ongoing lawsuits against Coinbase and Binance unfolds, market participants are eagerly awaiting the results and potential implications for the sector. It is clear that the stakes are high and that the need for clear regulation adapted to the rapid evolution of the 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?

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

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