The SEC is attempting to gain regulatory oversight of cryptocurrency products and platforms that may be engaging in the sale and offering of securities. Securities are strictly regulated and require detailed disclosures to inform investors of potential risks. Since the first cryptocurrency (Bitcoin) launched in 2009, the question of how exactly to fit the components of this new, decentralized financial ecosystem into traditional categories has been widely debated.
Are Cryptocurrencies Securities?
The SEC has long held that an “investment contract” is the basic definition of a security. But tokens are not investment contracts.
The difficulty in answering the question is the fact that not all cryptocurrencies are the same. But since terms like “coin,” “token,” “currency,” and “asset” are regularly used interchangeably to describe the thousands of products under the “cryptocurrency” umbrella, we can’t categorize them based on nomenclature alone. Instead, one must look at function.
We discussed the various definitions of a “security” in our What is a Security article. The basic definition is “an investment of money in a common enterprise with profits to come solely from the efforts of others; and, if that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative, or whether there is a sale of property with or without intrinsic value”. SEC v. Howey Co., 328 U.S. 293 (1946)
The SEC has stated that cryptocurrencies like bitcoin are not securities. This includes cryptocurrencies such as Bitcoin, Ether, and Litecoin.
However, the SEC Chair Gary Gensler said, in August 2021, that the SEC considers many cryptocurrency coins and tokens to be securities under the Howey Test, saying, “If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that’s a security.”
Of course, now we are mixing the concept of the actual token as a security with the manner in which the token is marketed, but this will all shake out.
Unfortunately, we will get clarity in the worst possible way. Rather than propose regulations, the SEC has decided to create regulation by litigation, exposing market participants to lawsuits, and the expense of time and money for conduct which was not a violation when conducted.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.