Cryptocurrency traders are facing increased scrutiny from the US Securities and Exchange Commission (SEC), as the regulatory body asserts that certain widely traded digital assets should be classified as securities. This determination has significant implications, potentially subjecting these assets to regulatory requirements that could have far-reaching consequences for the cryptocurrency industry. However, the task of defining which coins qualify as securities is complex, as demonstrated by recent court rulings.
SEC Chair Gary Gensler has long maintained that numerous digital assets possess characteristics resembling securities. His stance has only grown more stringent, as evidenced by recent legal actions taken by the SEC. On June 6, the agency filed a lawsuit against Coinbase Global Inc., the largest cryptocurrency trading platform in the United States. According to Bloomberg, The SEC alleged that Coinbase unlawfully listed multiple tokens. In a separate case announced the day prior, the SEC accused Binance Holdings Ltd. of also listing unregistered securities. These lawsuits resulted in the SEC classifying 19 digital tokens traded on these platforms as securities. Investors reacted to this classification with concern, leading to a significant market sell-off. The combined market value of these coins decreased by approximately $23 billion in the week following the initial lawsuit.
Determining whether a coin qualifies as security presents a challenging question. As demonstrated by a recent federal court ruling in July, the status of a specific token, XRP, changed depending on the nature of its sale. The court determined that XRP constituted security when sold directly to institutional investors but not when traded on exchanges for the public.
The recent actions and statements from the SEC highlight its increasing focus on cryptocurrencies and the potential classification of certain tokens as securities. The regulatory landscape surrounding cryptocurrencies is evolving rapidly, and market participants are closely monitoring developments. The determination of whether a coin is a security carries significant consequences for traders and platforms alike. As the debate continues, industry participants are navigating a complex and evolving regulatory environment, seeking clarity on the classification of digital assets and their associated obligations.
Dr Charis Savvides, an experienced corporate lawyer and law lecturer at the University of Nicosia (MSc is Blockchain and Digital Currencies), provides some context on the evolution of legislation in crypto. In general, the industry was not expecting anything too different from the traditional finance industry. The first EU regulations and licences for exchanges and custodians demonstrate clearly that the first reaction from legislators was to manage criminal activity rather than rules to encourage mining or tokenisation. This is also seen in other jurisdictions, including the US, Singapore, and Asia.
MicA in the EU is the first comprehensive set of rules on a global scale, whereby a legal comprehensive set of rules deals with a broad number of crypto-related activities, creating a more transparent environment and trust between businesses and consumers. Although crypto is borderless, a uniform global crypto legislature is unlikely to emerge. In the past, as countries responded to the negative aspects of crypto, which manifested as criminal activity, it became clear that responses were largely similar. Crypto debuted in society as an alternative to the existing centralised financial framework consisting of banks, financial institutions, and associated regulations.
The SEC’s actions have sway globally. Although the legal context in the US is different and rigid in some cases, e.g., the reporting obligations for US citizens worldwide and the onerous rules for global banks and service providers for reporting income, it becomes arduous but necessary for international institutions to meet these requirements. In the medium to long term, regulators in other jurisdictions usually take the same approach as the US. The way the SEC actions are interpreted is such that political and financial forces exert pressure on the SEC to keep the crypto industry’s development under close monitoring and control. “I do not expect the SEC or any other regulator in the US, actually, to show much greater flexibility at this stage,” Dr Savvides declared. The default position is negative.
To survive what was deemed a hostile environment, there were two options: (i) convince governing bodies that it is necessary to draft new rules to accommodate crypto, (ii) to exist in such a manner whereby existing rules could be applied to crypto, akin to ill-fitting garments. The latter option became the modus operandi. Stringent rules exist for KYC and AL of new clients as well as transaction monitoring. Much of the promise of crypto- democratisation of finance and decentralisation- was compromised for survival purposes.
Regulatory risk is an important factor for established institutions to consider when entering new markets, and the development of a robust legal framework is necessary for the industry to boom. The legal industry must develop a firm understanding to support the industry rather than criminalising behaviour or issuing generic restrictive rules. Dr Savvides opines that centralised exchanges are better positioned to survive given their similarity to existing businesses. In contrast, decentralised exchanges have business structures that are not aligned to existing ones and experience many issues, thereby rendering regulators more cautious.
Ouinex S.A. is a French public limited company with its registered office at 229 rue Saint-Honoré, 75001, Paris. It is registered with the Nanterre Trade and Companies Register under the number 911 669 828. This does not constitute investment advice, nor an invitation or recommendation to engage in any digital asset transactions. Any investment or trading involves risks. Past performance does not guarantee future results. Investing in digital assets carries a risk of total or partial loss of capital. Only risk the capital that you are willing to lose.
