1. What does the SEC do?
Its chairman, Gary Gensler, and Trump-era predecessor, Jay Clayton, say many digital assets have the characteristics of securities. Gensler warned last year that agencies were planning to take a tough line in enforcing rules on these tokens. Anxiety rose among crypto traders when they took the unusual step of identifying nine cryptocurrencies, seven of which were traded on Coinbase, the largest US cryptocurrency trading platform. Separately, Bloomberg News reported that Coinbase faces an investigation by the SEC over whether it listed assets for trading that should have been registered with the SEC.
2. What do you mean by securities?
In its simplest form, whether something is a security under U.S. rules is basically a question of whether it looks like stock issued by the company raising the money. To make that determination, the SEC applies a legal test based on a 1946 Supreme Court decision. Under that framework, if an investor puts money in with the intention of profiting from the organization’s leadership efforts, the assets may be under his SEC’s jurisdiction. In December 2020, the agency sued Ripple Labs Inc. for raising money by selling the then-third-largest XRP digital token without registering it as a security. The SEC alleged that the company is funding its growth by issuing XRP to investors betting that the value of XRP will rise. The case is now a major legal battle with Ripple hiring former SEC Chairman Mary Jo White as its attorney.
3. Why do you call tokens a security issue?
First of all, such a designation would make operating a cryptocurrency exchange more expensive and complex. US regulations impose strict investor protection requirements on platforms and issuers for this label. This burden puts smaller platforms at a disadvantage compared to their well-financed competitors. Additionally, exchanges face ongoing scrutiny by regulators, which can lead to fines, penalties and, at worst, prosecution if criminal authorities are involved. It could also result in increased compliance burdens and loss of future funding from investors wary of regulatory scrutiny. Proponents of more regulation believe that security designations bring more information and transparency to investors because the SEC’s disclosure requirements apply.
4. Who is against that approach?
Cryptocurrency enthusiasts say the old rules are less suitable because their businesses are decentralized, and cryptocurrency trading platforms argue that listed assets should be considered commodities, not securities. doing. In the United States, the rules governing commodity trading and their derivatives are focused on enabling companies, producers and farmers to effectively use derivatives to hedge the risk of commodity price volatility.
5. What does the crypto community want?
On Capitol Hill, efforts are underway to give the Commodity Futures Trading Commission, the US derivatives watchdog, the power to directly regulate crypto assets. Currently, it primarily oversees cryptocurrency futures, and as with dozens of cryptocurrency cases, enforcement action can be taken in the event of fraud or manipulation in the underlying market. Traditional market cryptocurrency executives and giants such as Citadel Securities have joined industry pressure behind the bill from top members of the Senate Agriculture Committee. It said a rule focused on would offer more protection to retail investors.
6. How will the institution split the virtual currency?
To some extent their approach reflects their origins. The SEC was founded in the wake of his 1929 market crash and sees as its core mission protecting investors by requiring massive disclosures by financial institutions. CFTC’s roots go back to the agricultural sector, helping farmers protect against drought. The CFTC and US rules on commodities and their financial derivatives are widely regarded as a low-burden regulatory regime. So, it should come as no surprise that the crypto crowd desperately wants the CFTC, not the SEC, to be their regulator.
7. Which coins are considered securities and which are not?
Simply put, there is a lot of ambiguity outside of the biggest cryptocurrencies. US regulators, including the SEC, have agreed that Bitcoin, the largest digital asset, is not a security. It was started by an anonymous person named Satoshi Nakamoto and does not exist as a way to raise money for a specific project. The second-largest token, Ether, may have started qualifying as a security during the Trump administration, but his SEC officials suggested the Ethereum Foundation used it to raise funds. , was not considered a security. It has grown to be well decentralized and perhaps no longer one. However, after Ethereum changed to a system in which “staked” coins play a role in recording transactions, Gensler said the fact that staked coins could earn interest led regulators to consider them securities. said that it may begin to treat as The CFTC considers Ether a commodity, and the CME lists Ether futures as well as Bitcoin.
Gensler said that when exchanges work with agencies to register, they can waive some of the rules that are better suited to digital assets while ensuring investor protection. But he doesn’t provide a roadmap for how that could be achieved. Meanwhile, lawmakers are considering several proposals that could give the CFTC and U.S. banking regulators greater power over some asset classes. At the same time, if the SEC’s insider trading lawsuit goes to court, we may get a clearer picture of which types of tokens qualify as securities and which types should be considered commodities. In September, the White House released a series of reports submitted by various agencies that together it said constitute a “comprehensive framework for the responsible development of digital assets.” However, the report did not resolve what was a patchwork of overlapping approaches and jurisdictional disputes.
9. Is this another issue?
yes. Globally, different regulators have taken different positions on whether or not to treat cryptocurrencies as securities. The UK’s Financial Conduct Authority states that “payment tokens” like Bitcoin and “utility tokens” that provide access to services are not regulated, but are considered investments with a right of repayment or a portion of the profit. We regulate digital assets. Singapore regulates both types, but with different laws. Coins, which are digital representations of other assets, such as unlisted stocks, are considered securities. In June, the European Union reached a tentative agreement to impose common cryptocurrency rules on all 27 member states and develop a new legal framework to regulate public offerings of crypto assets.
• Treasury report on issues related to crypto regulation.
• Take a look at the crypto industry’s moves in Washington to circumvent securities regulation.
• Bloomberg Businessweek’s SEC Chairman Gary Gensler’s first interview on cryptocurrencies.
• BGOV OnPoint for cryptocurrency legislation being considered by Congress.
• The 2018 Bloomberg QuickTake shows how long these battles have been going on.
• Executive Order on Virtual Currency Regulation signed by Biden.
• Article on the SEC’s battle with Ripple.
• Breakdown of regulated and unregulated tokens by the UK FCA.
More articles like this are available at bloomberg.com.