Things like the XRP case, Securities and Exchange Commission (SEC) and chair Gary Gensler, and challenges of crypto regulation constantly surface in crypto news. All of these things are not easy to understand from the get-go, especially if you are not familiar with the lingo. Let’s try to unravel the legal jargon and get down to the essence of the debate, as well as understand why so much attention is given to the discourse, in this article.
To begin with, we suggest you catch up with the terminology that is at the core of the debate. There are three definitions of publicly traded goods and assets which cause some confusion because the place of digital assets is not universally determined.
What Categories of Financial Instruments Does Crypto Usually Fall Under?
Commodities
Commodities are basic goods that are interchangeable with other goods of the same type. It does not refer to products but rather raw materials because they are more uniform in quality between different producers.
Commodities are not necessarily physical objects, as bandwidth and cell phone minutes also fall in the same category. Applying the same logic, we could argue a digital asset is the same thing. Outside of the US, virtual currency is usually thought of as a commodity.
Securities
Securities are legal representations or obligations that deal with cash flows from various activities, for example, the business and revenue of a company. Like assets, they persist through their use, which separates them from commodities.
A shorter definition of securities is an investment contract. It comes from the Howey test that defines securities as “investments of money; in a common enterprise; with an expectation of profit; through actions of others”. If we define crypto assets by how people use them instead of viewing them for what they are, in some cases they can seem similar to investment contracts.
Currency
Currency is one of the forms in which money and value exist. For historical and political reasons, money is denominated in different currencies. Nevertheless, it is universally recognized that all currencies represent money as a medium of exchange and a store of value.
Whether crypto assets can really be called a currency is also something people argue about. For one, unlike fiat currency, crypto defies national borders.
Crypto Assets are Commodities: Arguments
If crypto is a commodity, it indeed can be traded as a digital asset representing a piece of code or a hash in a blockchain. Interestingly enough, this is a point of view with which even crypto critics tentatively agree.
Before the current leadership, the Securities and Exchange Commission (SEC) considered crypto assets to be more like commodities such as gold or oil. One of the consequences of this stance was their being in the jurisdiction of the Commodity Futures Trading Commission (CFTC), among other things.
Not everyone is as open to the idea of pieces of data being the same as real-world goods. In the case of oil or sugar, even when it is not traded, you still have a good with universally recognized utility that usually can be turned into products. In the case of crypto assets, things are further complicated by the fact that inputs are part of a publicly accessible ledger; users verifiably own only their own addresses or accounts.
Crypto Assets Are Securities: Arguments
Contrary to the previous point of view, this is the stance that the current SEC maintains with Gary Gensler as chairman.
Going back to the Howey Test, people who take this stance claim crypto securities meet at least three of the four criteria. It involves an investment of money, sure; into a common enterprise, perhaps; with an expectation of profit, hard to argue. The fourth criterion of the Howey test, “from efforts of others” is the main point of contention.
The thing about this method is that it traces back to the 1940s. A lot of people maintain such an antiquated method is outdated when talking about digital assets.
Crypto Assets are Currencies: Arguments
It’s hard to imagine but even the naming convention “cryptocurrency” is controversial. Whether you believe crypto belongs to this category or not correlates strongly with whether you are a crypto critic or advocate.
The definition of currency draws upon the functions of money. Critics and advocates argue over whether Bitcoin or other assets meet these criteria or not. For example, those who think cryptos are not currencies claim it lacks such functions as a medium of exchange (not universally accepted as money) or store of value (as they are very volatile).
Cryptocurrency proponents cite the original principles upon which Bitcoin was built: being a peer-to-peer digital cash. They believe Bitcoin and other cryptos can be used to pay for goods and services and that its limited supply prevents it from losing value due to inflation.
Why Does It Even Matter Which Category Crypto Belongs To?
Why this debate is given so much attention in the cryptocurrency news, then? Especially considering that most of them concern the SEC of the US. A lot of jurisdictions outside of the US seem to have settled on defining crypto assets as commodities.
Crypto industry members are closely following the Ripple v. SEC case because, in the US, the law relies on legal precedents rather than existing rules. This system makes it so that even if there is no comprehensive legal framework, based on one or several cases judges can reliably establish further actions. If XRP is ruled to be a security, it would need to adhere to federal securities laws of the US, which imply procedures such as registration, that XRP did not follow. Moreover, it would change the regulatory status and create a precedent for other crypto assets, and their founders then can be sued for violation of the Securities act.
Such a decision would radically change the crypto industry in the US. It will not be destroyed completely because it is more or less established Bitcoin and stablecoins are not a part of this conversation. In addition, there are already crypto security tokens that sought registration voluntarily. Such crypto asset securities go against the cryptocurrency ethos because they require the holders to not be anonymous. Therefore, the question of how fungible crypto assets should be defined under cryptocurrency regulation is more of an ideological one than legal.
Crypto investors outside of the US watch the situation unfold because it concerns them, too. A significant chunk of current leading crypto companies is registered in the US. Can you imagine what would happen if they are suddenly required to follow strict American securities laws? For sure, investors there will have a higher degree of security because the companies will be held responsible. On the other hand, the market participants will need to give up all anonymity. It could lead to US-based crypto enthusiasts being cut off from the rest of the crypto world.
Conclusion
At the end of the day, as of now, the speculation about the consequences of this debate’s results is just that — speculation. There is no guarantee it will necessarily play out as we imagined, and it will definitely not destroy crypto completely. Nevertheless, even a single case will be able to change the face of the crypto industry, so it is a vital chapter in the history of crypto regulation.
We hope this article equipped you with a better understanding of what’s going on. If you feel like learning more about crypto markets and projects, continue to the ChangeHero blog or Medium! For daily updates, subscribe to our Twitter, Facebook, Reddit, and Telegram.
