Are Cryptocurrencies Securities or Commodities?

Figuring out whether cryptocurrencies are securities or not is a complicated question. Since the first cryptocurrency (Bitcoin) launched in 2009, a plethora of cryptocurrencies have been created. According to CoinMarketCap data, there are currently around 17,000 cryptocurrencies in the market.The question of how to traditionally categorise the components of this new, decentralized financial ecosystem has been debated since 2009.

Recently, the SEC (US Securities & Exchange Commission) stated that it considers a range of widely traded digital assets as securities. This position may impose regulatory requirements that many crypto supporters say could be a serious obstacle for the crypto industry. 

Cryptocurrencies

A cryptocurrency is a digital or virtual currency that is secured by cryptography. Encryption makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology— a distributed ledger enforced by a disparate network of computers.

A defining feature of cryptocurrencies is that they are generally not issued by any central authority. This makes them theoretically immune to government interference or manipulation.

Part of cryptocurrency’s appeal is that it has, until now, been largely independent of intermediary entities, such as banks and stock exchanges. Consequently, it has successfully eluded regulation by institutions. This lack of oversight has allowed cryptocurrency to operate on an almost instantaneous basis among a large cohort of users. However, for these same reasons, crypto has also shown itself to be extremely volatile and lacking sufficient investor protections.

Securities 

A security is a financial instrument, typically any financial asset that can be traded. The nature of what constitutes a security generally depends on the jurisdiction in which the assets are being traded.

In the United States, the term broadly covers all traded financial assets and breaks them down into three primary categories:

– Equity securities – which includes stocks

– Debt securities – which includes bonds and banknotes

– Derivatives – which includes options and futures 

Securities — as opposed to commodities — are strictly regulated and require detailed disclosures to inform investors of potential risks. These are the key factors to take into consideration when we ask the question “are cryptocurrencies securities?”

Commodities or Securities?

Figuring out whether cryptocurrencies are securities or commodities is a complicated question that has been encountered globally. More generally, the issue is how to regulate the crypto world.

The SEC is pushing for more regulations for cryptocurrency products/platforms that may be engaging in the sale of securities. They have called for cryptocurrencies to be classified as securities and urged crypto companies to register with them. According to the SEC Chair, the crypto industry doesn’t need new guidelines and the SEC’s existing rules apply to it.

Based on this view, most crypto or tokens qualify as investment contracts. In particular, stablecoins could be considered securities depending on how they’re pegged. 

The issues

The key concept is that the SEC will continue to regulate the crypto industry based on existing rules. This is concerning news for crypto entrepreneurs, who hoped that they would create additional regulations according to crypto’s structure. 

Terms like “coin,” “token,” “currency,” and “asset” are regularly used interchangeably to describe thousands of crypto products. This makes it difficult to accurately categorize them based on nomenclature alone. The function is what makes the difference.

For example, when determining whether a digital asset is a security, the SEC considers whether it constitutes an “investment contract.” For an asset to be considered an investment contract, it must meet these three criteria:

(1) The investment of money 

(2) In a common enterprise 

(3) With a reasonable expectation of profits to be derived from the efforts of others.

In some cases, cryptocurrencies can look similar to securities, like when they’re issued like stock in initial coin offerings (ICO). The ICO are the capital-raising processes for blockchain or crypto-related businesses. 

They raise funds by issuing digital coins and granting holders access to the crypto business or project. They are also granted access as to the potential profits generated. This is similar to how initial public offerings, or IPOs, or capital-raising events for companies and issue stocks. 

The cryptocurrency lending market, broadly known as yield farming, also has some resemblance to debt securities. This involves lending out cryptocurrencies and getting paid in interest or fees in return. A similar operation in the stock market is known as share lending.

Based on these considerations, Bitcoin would not be considered a security because it does not promise gains to anyone. Furthermore, there is no party collecting investment in exchange for the promise to pay returns generated through its activity. 

Conclusions

Determining whether cryptocurrencies are securities or commodities is important because it determines how the industry will grow and be regulated.

Getting classified as a commodity would likely make cryptocurrencies like Bitcoin be more lightly regulated. Some regulators have said cryptocurrencies are not a security, but the situation is more complex. ICOs have been considered similar to other capital-raising practices in the securities markets, like IPOs. In many countries the debate is still ongoing and this may lead to a variety of outcomes.

See Also: Tokenomics for meme coins

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