Surprising Cryptocurrencies That Are Not Considered Securities

Surprising Cryptocurrencies That Are Not Considered Securities


Learn about the ongoing debate on whether cryptocurrencies are securities, including the Howey Test and which cryptocurrencies are considered securities, and the implications of their regulatory status on the market and investors.

The digital currency market raises numerous questions concerning its financial and regulatory status, including whether digital currencies are securities​​. Securities are typically negotiable financial instruments with monetary value announced by corporations or governments, which are likewise well-regulated, and investors must be notified about potential risks​​.

On the other hand, digital currencies are largely unregulated, and their status as securities remains debated and unclear. Exchanges and cryptocurrency developers exercise caution to operate within the law in numerous financial jurisdictions. Nonetheless, these laws and requirements differ from one jurisdiction to another, contributing to the issue’s complexity​.

What Is the Howey Test for Crypto?

Classifying cryptocurrencies as securities or commodities is a topic of ongoing debate in numerous jurisdictions. This is primarily owing to the unique nature of cryptocurrencies and the fact that they do not fit into traditional investment classifications.

The United States Securities and Exchange Commission (SEC) proposed the Howey Test to determine which offerings qualify as securities. This test posits that for a transaction or an investment to be classified as a security, it must involve an “ financing of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

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Applying the Howey Test to cryptocurrencies generates mixed results:

  • Investment in Money: Cryptocurrencies pass this criterion as investing in them involves money​​.
  • In a Common Enterprise: This criterion is met to some extent. For example, in cryptocurrency lending services, clients lend out their money expecting a fixed or variable profit according to how an exchange uses it​​.
  • Expectation of Profit: Although while numerous cryptocurrency investors intend to profit, there are exceptions, like crypto stablecoins, which are used as a store of wealth, not for profit, classifying them more as a currency than a security​​.
  • Efforts of Others: Here, cryptocurrencies traditionally do not pass the test, as no third party is typically involved in ensuring investors’ profits. It is more about collective market sentiment and investor activities. Nonetheless, owing to third party involvement, crypto stablecoins and certain cases like cryptocurrency staking and lending services may pass this test​.

Regardless of these guidelines, confusion lingers over which cryptocurrencies the SEC’s criteria should label as securities.

Conversely, commodities are interchangeable basic goods that commerce utilizes, substitutable with other goods of a similar kind. Several cryptocurrencies, particularly Bitcoin, have been considered commodities because any particular entity did not issue it, and their value does not depend on the performance of an underlying company.

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Which Digital currencies Are Not Securities?

Often, digital currencies do not meet all the criteria of the Howey Test, which is why they can potentially not be classified as securities.

For example, the expectation of profits when investing in digital currencies traditionally depends on market forces of supply and demand, not necessarily on the efforts of a common enterprise or third parties. This distinction separates them from securities, where the issuing entity’s efforts typically generate profits.

The SEC has declared that Bitcoin (BTC) and Ether, the digital currencies underpinning the Bitcoin (BTC) and Ethereum (ETH) networks, respectively, do not fall under the category of securities. This is largely owing to their decentralized nature. The agency no longer views them as securities when a digital currency becomes sufficiently decentralized, as Bitcoin (BTC) and Ether have become.

On the other side , the SEC almost always views smaller initial coin offerings, or ICOs, as securities.

Similarly, in a landmark case in Connecticut, a federal jury concluded that Paycoin and plenty of digital currency mining-related assets are not securities, marking the 1st time a federal jury has considered whether a digital currency is a security. The jury followed the Howey Test to determine whether the products constituted an financing contract or security. After deliberation, they concluded that the products at issue did not constitute a security​​.

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Nonetheless, one should note that factors such as the specific details of the digital currency, its underlying technology, and the jurisdiction evaluating it can influence the classification of a digital currency as a security.

This is why, this information may not apply to all digital currencies, and it is always advisable to consult with a legal professional or regulatory guidance when dealing with these issues.

Which Digital currencies Are Considered Securities?

The regulatory and legal spaces are still wrestling with the complex issue of deciding which digital currencies qualify as securities. The SEC typically applies the Howey Test to determine whether a digital currency qualifies as a security.

Recently, the SEC has identified a number of digital currencies as securities. The list of these crypto-assets classified as securities includes:

What Happens If Digital currencies Are Securities?

Suppose a digital currency is classified as a security. In that case, it becomes subject to the regulatory framework governing securities. This includes registration requirements, disclosure obligations, and other legal responsibilities designed to guard investors.

  • Registration: The issuer must register the offering with the SEC unless an exemption applies. Registration involves supplying detailed information about the company, its management, and the security itself. This is a substantial process and can be expensive and time-consuming.
  • Disclosure: Issuers of securities must make regular disclosures to the public, including financial statements and information about their business operations, danger factors, and management.
  • Compliance and Enforcement: The issuer must comply with numerous laws and regulations designed to guard investors. If the issuer fails to comply, it  can potentially face enforcement actions from the SEC, which could result in fines, penalties, or other sanctions.
  • Broker-Dealer Regulations: If the digital currency qualifies as a security, then anyone taking part  in its sale can potentially require registration as a broker-dealer. This requirement extends to exchanges that facilitate the trading of the cryptocurrency.
  • Investor Limitations: Only accredited investors, individuals or entities that fulfill certain financial criteria, can buy some securities. This could limit the pool of potential buyers for the cryptocurrency.
  • Legal Ramifications: Should a digital currency receive a security designation after its issuance, investors may file lawsuits against it, especially if the ICO did not adhere to securities laws.
  • Market Perception: Lastly, being classified as a security may affect the market’s perception of the digital currency. Several investors may see it as a more legitimate investment, while the increased regulation and potential for reduced liquidity may deter others.
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Cases such as BlockFi’s interest prices account not being registered as a security highlight the ongoing complexity. This led to a $100 Million fine for BlockFi, which neither accepted nor rejected the allegation​.

The SEC’s lawsuit against Ripple for not registering XRP Ripple (XRP) as a security presents another example of negatively impacting the industry.

The agency’s view of certain digital currency assets as securities has even led to an investigation of Coinbase Crypto exchange. Consequently, numerous crypto tokens have been delisted from Coinbase Crypto exchange, the US-based arm of Binance Crypto exchange, and Kraken.

Implications of Digital currency’s Regulatory Status

The unclear regulatory status of digital currencies has whole lot of implications, making the idea of wide-ranging regulation seem unlikely. As long as they are unregulated in one jurisdiction, arguing for their legal status in others will always be challenging. This issue likewise influences the usage and trading of cryptocurrencies.

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Governments seeing as regulating cryptocurrency must likewise contend with general market dangers, such as the irreversibility of blockchain tech transactions, the  capacity for scams, hacks, and manipulation, and the volatility of digital currency values​​.

Regardless of the regulatory challenges and uncertainties, future of the digital currencies remains promising. They have the  capacity to revolutionize numerous aspects of finance, from payments and remittances to lending and fundraising.

As regulatory authorities, industry players, and investors continue to navigate the complexities of this new digital frontier, it is essential to foster an environment that supports innovation while ensuring adequate protection for all participants.

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