© Provided by CoinDesk (Mark van Schiok/Shutterstock).Stocks and commodities are two very different financial instruments and are regulated by two different US government agencies. When it comes to cryptocurrencies, the legal decision that a cryptocurrency is a financial instrument has major implications for how it can be traded, where it can be registered, and who can be sued if the issuer goes any further.
The answer to this question is far away, and given the size of the crypto market, this may not be a one-size-fits-all solution, but it varies from token to token.
In this article, we will attempt to explain the difference between commodities and commodities and examine the ongoing debate about whether cryptocurrencies should be classified as one or the other.
Description of warranties and products
To get started, we will first define stocks and commodities.
Securities are financial instruments such as stocks, bonds and derivatives that represent claims on the issuer and are regulated by the Securities and Exchange Commission (SEC). One year after the landmark 1946 case, SEC v. WJ Howey Co. The US Securities Act has defined the sale of securities as "investment contracts", which means that the person who invests money in a security "expects profit only from the efforts of the promoter". or a third party" as decided. Investors can then realize these gains by selling securities or receiving dividends or interest payments. The “Howey test” stemming from this ruling will be used in several SEC enforcement cases, notably in the DAO case involving the Ripple XRP token and the new Dapper Labs, NBA Top Shot, sports betting token (NFT) and related markets.
On the other hand, goods are physical goods that are sold in bulk. They may include agricultural products such as corn and wheat, as well as precious metals such as gold and silver. Goods are usually traded at current market prices. In the United States, some commodity trading abuses are regulated by the Commodity Futures Trading Commission (CFTC), but the agency still lacks broad powers to regulate local trading, such as those of the SEC on securities.
Why is cryptographic or commodity security important?
So how does this affect cryptocurrencies and their regulation?
If a cryptocurrency is a security, issuers and exchanges of the cryptocurrency must obtain the necessary licenses from securities regulators. This is often very difficult to do, which is why the crypto industry goes to great lengths to ensure that the sale and development of cryptocurrencies does not comply with security regulations.
Decentralization is a key way for issuers to avoid violating securities laws. An asset is considered safe if it is created in such a way that a coordinated central group of security regulators cannot identify the cryptocurrency being created. Indeed, decentralized finance (DeFi) projects are taking steps to decentralize the development and management of their projects through decentralized autonomous organizations (DAOs), as well as mechanisms such as Proof of Stake and consensus mechanisms. The argument is that if people are both investors and involved in project development, they won't rely solely on "third parties" for profit by contributing the coin and acting as validators or voting on DAO decisions. What does the Hawaiian test require?
The risk of classifying cryptocurrencies as securities is that they are not listed on an exchange to avoid the risk of listing penalties for securities that are not registered with the SEC. There are other interstate laws and regulations that could put cryptocurrencies at risk, such as the New York Attorney General's lawsuit against KuCoin, or regulators in several states teaming up to crack down on Elon Musk's game.
One of the first official guidance issued by the SEC concerns the ICO (Initial Coin Offering) boom. The Securities and Exchange Commission's Center for Strategic Innovation and Fintech strengthened its lead in April 2019 with the release of the "Digital Asset Framework for Investment Contract Analysis", noting the speculative nature, lack of resources, and lack of leverage of many ICOs. Payment or storage of value as a basis for classifying these coins as securities.
One of the failed ICOs was Kick. After Kik CEO Ted Livingston mistakenly told people that buying Kin tokens would make them "a lot of money," the SEC sued Kik, alleging that it tricked investors into buying Kin tokens in hopes of making a profit. The SEC ultimately fined Key $5 million; The lawsuit almost bankrupted the company.
On the other hand, the CFTC claims that cryptocurrencies like bitcoin and ether are commodities and can be regulated by the Commodity Markets Act (CEA).
The CTFC's main argument is that, for example, since bitcoins are exchangeable for money, each bitcoin is worth the same as a sack of corn compared to another sack of corn of the same variety. This commitment was reinforced by the CFTC case against the Bitfinex crypto exchange and its subsidiary, the stablecoin issuer Tether. In an October 2021 statement, the agency stated that “digital assets such as bitcoin, ether, litecoin, and tether” are commodities.
Where is the debate about regulation?
There are many stakeholders and many moving parts, so it is difficult to predict what the regulatory environment will look like in a year. Much of the effort of the US Congress has been focused on giving the CFTC more freedom to regulate the trading of fiat cryptocurrencies, of which bitcoin is the only one that the two agencies have openly agreed on.
A possible outcome of this debate is that some cryptocurrencies are classified as securities and others as commodities. This can lead to a complex regulatory framework where different cryptocurrencies are subject to different rules and regulations.
Another option for lawmakers is to treat cryptocurrency as a separate asset class with separate rules. This is an approach widely adopted by the European Union and the Crypto Asset Markets Regulation (MiCA) sets out the measures that cryptocurrency issuers, wallet providers and exchanges must follow to protect consumers and ensure fair trading. However, in each case there may be gray areas that should be taken into account, since a certain series of non-perishable tokens must comply with the rules.
In April 2023, Rep. Patrick McHenry (R-N.C.) announced that he would have a cryptocurrency bill sponsored by Senator Cynthia Lummis (R-Wyoming) that would focus on securities and material issues and premiere in within two months. She is known as the "Crypto Queen" of the Senate. In 2022, Lummis, along with Senator Kirsten Gillibrand (DNI), introduced the Responsible Financial Innovation Act (RFIA) to clearly define the nature of securities and commodities. Lummis hopes to introduce a new, improved version of the bill in the summer of 2023.
Meanwhile, SEC Chairman Gary Gensler believes the agency has jurisdiction over cryptocurrencies and that “most crypto tokens are securities,” but declined to answer at a controversial April 2023 hearing to find out if Ethereum is a security. SEC lawyers indicated that while the agency does not have an official opinion, employees may consider Voyager VGX crypto tokens as securities.
In May 2023, the SEC removed the definition of "digital asset" from the final version of the hedge fund rule, which would be the first formal definition of the term, saying that it would "continue to review the term" for the time being. . . .