Securities or commodities - the debate regarding crypto's classification
Lawsuit on the table
Is crypto a security, like bonds and stocks, or a commodity, like gold and coffee? The digital asset industry has caught up in a regulatory whirlpool and the debate regarding crypto’s big brother is still on. If cryptocurrency is a security, sellers and buyers would need to issue necessary licenses from their regulators that are difficult to attain. Due to the decentralized nature of Web3 and cryptocurrencies, exchange platforms such as Binance and Coinbase have been able to avoid securities law and dealing with the SEC…until now.
On June 5th, the U.S. Securities and Exchange Commission, whose role is to maintain efficient and fair markets and to protect investors, sues two of the world’s largest cryptocurrency exchange platforms, Binance and Coinbase. The allegations are made for not following the US securities laws by acting as unregistered brokerages. Binance’s allegations include unregistered sale of securities and Coinbase's for performing unregistered securities exchange. The SEC is collectively working towards minimizing the digital asset industry from illegal activities.
Is crypto a security?
The SEC chair Gary Gensler strongly believes that most cryptocurrencies are securities. Gensler bases his opinion on the Howey Test performed on transactions considered a security and whether they match the four criteria: Money is invested, there is an expectation the investor will earn a profit, the investment is in a common enterprise and that profits are generated via the efforts of others. Gensler has previously called Bitcoin a commodity but called it an exception, likely due to the confusion regarding the regulating entity of crypto and other digital assets.
Cryptocurrency classified as a security would mean that it would fall under the jurisdictional eye of SEC. “The risk for cryptocurrencies being classified as securities is that exchanges may not list them to avoid the risk of being fined by the SEC for listing unregistered securities” says Robert Stevens in his article Securities vs. Commodities – Why it matters for crypto (Coindesk.com 5.5.2023) Stevens continues: “There are also further state-by-state rules and regulations that cryptocurrencies can run afoul of”.
Bitcoin and a sack of corn?
Commodity Futures Trading Commission argues that crypto should be classified as a commodity. If this ends up being the case, CFTC would be its primary U.S regulator. Stevens writes about CTFC’s main argument: “bitcoin, for example, is interchangeable on exchanges – each bitcoin is of identical worth, just like how a sack of corn is of equal worth to another sack of corn of the same grade – it is a commodity.” However, CTFC does not rule out the possibility of a compromise, where some crypto are considered securities and some commodities.
More clarity is needed
The question regarding cryptocurrency’s regulatory debate remains unanswered with both SEC and CTFC being strongly biased. As with any ground-shaking innovations, the world of crypto needs clear guidelines and more clarity. The industry is gaining more attraction as the days go by. Christian Lopez, head of blockchain and digital assets at Cohen and Company Capital Markets in Forbes’s article How does the SEC regulate crypto? (Wayne Duggan 8.5.2023) says: “U.S. has fallen behind much of the rest of the world in providing a safe path forward for crypto innovators and entrepreneurs.” The last thing that the decentralized future of crypto needs is a fight between entities on who gets to intermediate.