The line that demarcates cryptocurrencies and traditional financial instruments has become a source of fierce debate among market participants and regulators. The U.S. Securities and Exchange Commission (SEC) has emerged as a central figure in this conversation, largely due to its role in regulating securities.
Recent SEC decisions have now firmly classified certain cryptocurrencies as securities, a move with significant implications for investors, exchanges, and the industry as a whole.
SEC POINT ON CURRENCIES AND STOCKS
The SEC has asserted that many digital tokens constitute securities, applying standards established under the Securities Act of 1933 and further explained by a number of landmark court decisions.
The significant case, the SEC against WJ Howey Co., introduced a “Howey Test” criterion to determine if a transaction qualifies as an investment contract, a security. The Howey Test checks whether a transaction involves investing in an ordinary business, expecting profits primarily from the efforts of others.
Applying these criteria to the cryptocurrency market, the SEC has highlighted the possibility that some tokens meet this definition, thus requiring compliance with established securities laws.
In a significant move, the SEC recently correctly identified several cryptocurrencies as securities. This list of crypto securities includes:
- XRP (XRP)
- Telegram Gram Token (TON)
- LBRY Credits (LBC)
- Decentraland (MANA)
- DASH (DASH)
- Power Ledger (POWR)
- OmiseGo (OMG)
- Algorand (ALGO)
- Naga (NGC)
- TokenCard (TKN)
- IHT Real Estate (IHT)
- Kik (KIN)
- Salt Lending (SALT)
- Beaxy Token (BXY)
- DragonChain (DRGN)
- Tron (TRX)
- BitTorrent (BTT)
- Terra USD (UST)
- Luna (LUNA)
- Mirror Protocol mAssets (Multiple Symbols)
- Mirror Protocol (MIR)
- Mango (MNGO)
- Ducat (DUCAT)
- Locke (LOCKE)
- EthereumMax (EMAX)
- Hydro (HYDRO)
- BitConnect (BCC)
- Meta 1 Coin (META1)
- Rally (RLY)
- DerivaDAO (DDX)
- XYO Network (XYO)
- Rari (RGT)
- Liechtenstein Cryptoasset Exchange (LCX)
- DFX Finance (DFX)
- Kromatica (KROM)
- FlexaCoin (AMP)
- Filecoin (FIL)
Filecoin’s inclusion on the list is particularly controversial, considering its extensive trading base across many US exchanges and its previous plans for a proposed trust fund with Grayscale Investments. . The SEC’s surprise decision resulted in the termination of the proposed trust fund registration, leaving stakeholders grappling with the implications. Grayscale said:
Grayscale does not believe that the FIL is a security under federal securities laws and intends to respond promptly to SEC staff with an explanation of the legal basis for Grayscale’s position.
UNDERSTAND THE EFFECTS OF TRADE CURRENCY SECURITIES
Selling unregistered securities generally constitutes a violation of U.S. law. This regulation requires securities to be registered with the SEC before being sold to the public.
While there are exemptions to this rule—such as sale to accredited investors or private placement—selling unregistered securities can result in penalties, including monetary penalties and profit sharing.
Under the new SEC classification, exchanges that list these tokens could face regulatory scrutiny. Several US exchanges have listed more than a dozen cryptocurrencies that the SEC classifies as securities, which could trigger regulatory actions and subsequently affect their operations.
The landscape has certainly become more complicated for investors in these newly classified securities. Mandatory regulatory compliance for securities trading means that investors must consider factors such as securities laws and regulations.
Furthermore, the marketability and liquidity of these tokens may be affected due to their new regulatory status.
Investors may find that trading opportunities for these tokens are limited if exchanges delist them to avoid possible regulatory penalties. This can reduce the liquidity of these tokens, making it more difficult to buy or sell them in the market.
Cryptocurrency exchanges that list these securities face challenges of their own. From a legal perspective, they risk sanctions and legal consequences if they continue to list these securities without the necessary registration or waivers.