Cryptocurrency regulations worldwide form a mosaic of diverse approaches. Some nations foster a crypto-friendly environment, while others tread cautiously, prioritizing investor protection. Striking the balance between encouraging technological advancements and mitigating risks remains an ongoing challenge as global authorities grapple with defining the boundaries of this evolving financial frontier. The case of the U.S. Securities and Exchange Commission (SEC) is remarkable in this field.
It seems like they’re taking an increasingly aggressive approach against crypto-related companies. Besides, it’s not only nationwide but also international. If any company, token issuer, or crypto-related project in general offers their services to U.S. investors, in any capacity, then they should be prepared to deal with the SEC. That’s why a lot of companies just decide to exclude US users from their platforms.
Currently, it’s not like a lot of crypto-related companies, foundations, or projects aren’t abiding by legal rules, though. They are, all over the world. But still, they don’t want to deal with the US SEC. And they’ll have to, if considered that they’re handling securities in the form of digital assets. Let’s learn more about this and how it could affect all the industry.
A long story
Maybe the most famous and long case around this topic is
“Probably” is an important word there. All the legal processes have shown that US regulators aren’t quite sure about the legal status of cryptocurrencies and, therefore, the institution that should oversee them. Is XRP a security? Is it a commodity? It took three years of legal battle for both sides to reach a sort of tie in July of this year. According to the court decision (still appealable), XRP was a security in the beginning when offered to be bought by institutions.
Now, it’s not a security anymore and, therefore, is outside the regulatory reach of the SEC. The legal issues continue, though. Perhaps Ripple, as a company, will end up paying a juicy fine, but we can say for sure that this isn’t exactly the end of XRP and its protocol. Sadly, it’s also not the end of regulatory concerns around cryptocurrencies.
More and more cases
Ripple is far from being the first “crypto-case” handled by the SEC. Or in other words, it’s far from being the first lawsuit or legal warning against crypto-related projects done by the SEC. They’ve been suing people in crypto since 2013. On its website, we can discover at least
Among those cases, we have very familiar names in the crypto industry, like ICOBox, ICO Rating, Block.One (for EOS), Telegram (for TON), Poloniex, BlockFi, Genesis, Gemini, Nexo, Kraken, Justin Sun (for TRON and BitTorrent), Bittrex, Binance, Coinbase, and Celsius —to name a few. They even sued some celebrities for promoting allegedly unregistered securities (ICOs), including Floyd Mayweather and Kim Kardashian.
Another remarkable case was the one against The DAO by Slock in 2017. They launched a quite successful Initial Coin Offering (ICO) the year prior and raised $60 million in ETH. Just afterward, they were hacked badly, and all their funds were drained. A polemical discussion started in the crypto community because Ethereum ended up making a forceful hardfork (software/chain update) to “roll back” the robbery. Not everyone agreed to break decentralization like that, and that’s how Ethereum Classic (ETC) was born.
However, the part pertaining to the SEC was that, according to them, The DAO team offered unregistered securities to US investors. That was illegal and punishable. Also, it was the first high-profile ICO to be accused of such a thing by the SEC, accompanied by
Security vs. Commodity
In the United States, the regulatory landscape treats securities and commodities distinctly. The Securities and Exchange Commission (SEC) oversees securities, while commodities fall under the purview of the Commodity Futures Trading Commission (CFTC). The second one is known to be less strict and entails lower compliance costs for the involved companies. Dealing with securities and the US SEC is a path
In case you’re wondering, a commodity is a raw material or tangible product that can be bought and sold, such as gold, oil, or agricultural goods. Its value is determined by supply and demand dynamics. On the other hand, securities are financial instruments representing ownership, debt, or the right to future cash flows. The key distinction between them lies in the nature of the asset and the financial rights it bestows.
For digital assets, it’s advisable to apply the Howey Test to discover if a token could be a security. According to
- “It is an investment of money.
- There is an expectation of profits from the investment.
- The investment of money is in a common enterprise.
- Any profit comes from the efforts of a promoter or third party.”
For instance, Bitcoin, Ether,
Implications for Crypto Players
A massive exodus of crypto companies and projects from the United States has been the main consequence. Most ICOs nowadays, for example, have established a full ban against US citizens on their official terms. Several crypto exchanges have paid millions in fines and then have retired from the US market, including Poloniex, Binance, and Bittrex. In addition, other exchanges are known for delisting “problematic” tokens if the SEC considers them securities.
XRP suffered that fate in
The mere affirmation has already brought consequences for the assets. Binance is phasing out support for BUSD, while Solana, Cardano, and Polygon
Beyond these considerations, the bigger picture is showing that the tight crypto rules the SEC wants to apply are hitting a lot of crypto investors not only inside the US but also abroad. Other jurisdictions worldwide might want to imitate those rules, leading to damage in innovation and lower crypto adoption by the most needed sectors (e.g., unbanked people).
For their part, crypto companies would need to follow complex rules and audits and invest
The bright side
To be fair, we must remember that the US SEC isn’t trying to be a villain. Their mission is protecting US investors that deal with risky assets, so, their approach could also bring some advantages. As it intensifies its enforcement actions, fraud prevention takes center stage, shielding investors from the pitfalls witnessed in recent platform collapses like FTX and Terra (LUNA).
The
Moreover, it seems like only a few tokens would fall into the SEC’s jurisdiction for now. Crypto investors must consider that the Howey Test and, therefore, all regulations for securities, could apply to their projects and tokens. Then, they should give their best to avoid failing that test. It’s always better for crypto coins to be considered commodities (or just not securities) and fall into more flexible regulations.
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