By Steven Krohn · October 3, 2018
A few months ago, there was a big debate over the nature of cryptocurrencies. The regulators began to tighten the restrictions on crypto trading. Both the supporters and opponents of digital media were looking to ask one major question.
Are Cryptocurrencies a form of financial securities?
Cryptocurrencies and digital coins have been compared to a lot of things. Bear in mind that Bitcoin was initially envisioned as a type of digital currency that would one day replace fiat currency.
Bitcoin and other digital coins can offer the three fundamental characteristics of currencies. They can be a store of value, a medium of exchange and a unit of accounting.
One of the prime drivers toward Bitcoin adoption was that it was similar to a financial instrument.
Other crypto platforms like Ethereum, Dash and Ripple were similar in many ways . When these platforms were launched, their developers advertised that the coin would be introduced on the public exchanges.
Hundreds of millions dollars were being raised and investors had the freedom to trade their holdings on the virtual exchanges.
These properties of crypto coins convinced many people that digital currencies were similar to a stock exchange. On the one hand, this gave a lot of credibility to crypto coins.
If these coins were similar to financial securities, then they were considered a safe investment option.
However, if digital currencies WERE SIMILAR to financial securities, then an objection was raised. Shouldn’t they be subject to similar checks and regulations as any other financial security would be?
The SEC first started getting involved with cryptocurrency in March in reviewing the practices of crypto trading. It determined that cryptocurrencies identified similarly to other financial securities, would be subject to SEC laws.
Enter June 2018. William Hinman, head of the Division of Corporation Finance at the SEC, declared that crypto coins, such as Bitcoin and Ether, were not securities. However, he also observed that a number of other ICOs and blockchain projects do fall in the category of financial securities.
Thus they would be subject to SEC laws.
What is central in determining whether a cryptocurrency is a security? Simply, it’s how the coins are being sold along with the reasonable expectations of the investors.
When an entity offers an ROI for the sale of coins, it’s to be considered a financial security.
The issue with cryptocurrencies is that for most platforms there is no centralized management. In a regular corporation, the management tends to make the decision of how the raised capital will be utilized.
They also decide how new capital will be added to the total.
Crypto platforms, like Bitcoin, are decentralized with no governing body. New coins are added by a decentralized ledger maintaining a network of nodes.
No one knows who or where the developer/company is that backs the project The SEC ruled that it was sufficiently decentralized to not be considered financial securities.
Ethereum on the other hand is slightly more complex. The network is currently decentralized while the Ethereum Corp. has very little control. The initial funding raised for the network can be considered similar to an ICO launch.
The SEC has also clarified that current trading in Ether cannot be classified as financial securities That said, the platform allows other tokens to be built on top of the Ethereum network.
Any project that raises and sells tokens using the Ethereum platform could be considered financial securities. That means being subject to SEC regulations.
Given the status of financial securities is both a good thing and a bad thing. If a new token is declared a security, they must abide by all the rules and regulations of the SEC.
This would make it more difficult for start ups to raise capital online. You would expect this to drive away new companies and investors.
The news is not all bad though. Being considered a security asset will give more credibility to the platform.
It may open the doors for other investors who want a safer, lower risk investment.. Compliance with government regulations will make it much more effective in raising finances.
The classification of crypto remains unclear and murky at best.
One would think that he affect on the markets can only be negative.