It is official cryptocurrencies are securities in the United States. The Securities and Exchange Committee (SEC) has classified 37 cryptocurrencies as “securities,” BeinCrypto claims.
If this claim is true, the SEC has the power to regulate those 37 cryptocurrencies. To explain, The Securities Act of 1933 makes it illegal to sell securities that are not regulated by the SEC in the United States.
SEC attorneys argue many cryptocurrencies meet the criteria for securities from a US Supreme Court case called SEC v. W. J. Howey Co, BeinCrypto speculates. Hence, if federal judges agree with the SEC, many cryptocurrencies could become securities overnight.
Does Cryptocurrency Pass the Howey Test?
To elaborate, lawyers use a set of criteria they call the “Howey Test” to determine if something is a security. SEC regulators like the Howey Test because it is simple.
Howey Test Criteria are:
1. There is an organization handling investor money. For example, a decentralized autonomous organization (DAO).
2. Investors expect to earn profits from the cryptocurrency.
3. The cryptocurrency itself will generate the expected profits through some internal mechanism such as staking or loan interest.
4. The cryptocurrency issuers promise a profit or return. For example, a high annual percentage yield (APY).
5. The issuers’ promises create an “investment contract” with purchasers.
6. An investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Hence, any security that violates the investment contract is illegal.
37 Cryptocurrencies are now Securities according to the SEC
SEC lawyers claim 37 cryptocurrencies meet the Howey Test criteria for securities, BEINCrypto speculates. Unfortunately, Beincrypto does not link to any SEC documents that back these claims.
According to Beincrypto the 37 cryptocurrencies the SEC calls securities are:
- 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)
Strangely, only one of CoinMarketCap’s top 10 largest cryptocurrencies by market volume appears on the SEC’s list. That crypto is XRP (XRP) the cryptocurrency formally known as Ripple. Interestingly, XRP’s promoters are in the midst of a legal battle with the SEC.
In a case called SEC v. Ripple, XRP’s developers, Ripple Labs, are challenging the SEC’s use of the Howey Test to regulate their cryptocurrency.
Conversely, some giant cryptocurrencies that could meet the Howey Test including Binance (BNB), Tether (USDT), and USD Coin (USDC) are absent from the BIENCrypto list of cryptos the SEC is trying to regulate.
Stablecoins are Securities
For example, Tether Holdings Limited sells USDT and uses the proceeds to purchase assets to back Tether and other stablecoins such as TetherGold (AUXT). Notably, Tether holdings held $53.045 billion in US Treasury Bills, $1.5 billion Bitcoin (BTC), $3.391 billion in precious metals, and $140.669 million in corporate bonds on 31 March 2023.
I think Tether (USDT) and Tetehr Gold pass the Howey Test. Tether Holdings collects money from investors: (USDT, XAUT, Tether CHN (CHNT), Tether EURt (EURT), and Mexican Peso Tether (MSXNT) owners. Then reinvests the money in various assets.
I also think USD Coin’s issuer (Circle) and Binance pass the Howey Test for securities. Notably, Circle claimed to back USDC with $29.7 billion reserves on 18 May 2023. Circle also claimed to back Euro Coin (EUROC) with €48.6 million on May 18, 2023.
Thus, I consider stablecoins securities. However, only one stablecoin, Terra USD (UST), appears on BEINCrypto’s list of cryptocurrenices that pass the Howie Test.
I suspect, SEC lawyers are waiting to see how the courts rule in SEC v. Ripple before going after well-capitalized organizations such as Circle and Tether Holdings LLC. Both companies can pay enormous legal fees.
SEC Lawyer Binance (BNB) fails the Howey Test
However, senior SEC trial attorney William Uptegrove accuses Binance of running “an unregistered securities exchange,” CoinDesk speculates. Notably, Uptegrove made the accusation in US Bankruptcy Court for the Southern District of New York (Manhattan) in March 2023.
“The staff believes – based solely on the facts and circumstances currently known to the staff – that the offering and sale of VGX tokens has the attributes of a securities transaction,” Uptegrove alleged. “The staff also believes that Binance.US is operating an unregistered securities exchange in the United States.”
Uptegrove was trying to explain the SEC’s objection to Binance.US’s attempt to buy the assets of the bankrupt crypto lender Voyager digital to U.S. Bankruptcy Court Judge Michael Wiles . Notably, Wiles is skeptical of the SEC’s claims.
It is easy to understand Wiles’ skepticism because Uptegrove admits, “The commission has not made any determinations on either of these issues.”The staff beliefs do not represent the of the commission.”
Will the SEC Regulate Crypto?
SEC Chair Gary Gensler believes most crypto trading platforms are unregistered securities exchanges, CoinDesk notes. Gensler wants crypto exchanges, such as Binance, to register with the SEC, CoinDesk claims. Gensler made that observation while replying to US Senator Elizabeth Warren (D-Massachusetts) in 2001.
I don’t think Gensler and Uptegrove would make such claims such claims if they thought could not support them. Hence, the SEC’s attorneys believe the courts will side with them. Although, Wiles is skeptical.
Unfortunately, it could years before a US Appeals Court or the US Supreme Court rules on the Howey Test and cryptocurrency. Applying the Howey Test to cryptocurrency could have enormous consequences.
For example, are nonfungible tokens (NFTs) securities and subject to SEC regulation? I think NFTs could be securities. What about other digital financial products such as PayPal (PYPL) and Apple Pay?
Hence, SEC vs. Ripple could affect some of tech’s biggest names. Hence, it is a case all speculators need to watch.
Is the SEC good for the Crypto Market?
Many crypto purists fear SEC regulators because they are extreme libertarians who think government is evil. Conversely, I think the SEC could boost the crypto markets.
To explain, SEC regulation could add a layer of legitimacy to cryptocurrencies, stablecoins, and other synthetic assets. Additionally, some speculators could think cryptocurrencies the SEC regulate are safer and pay more for them.
Notably, stablecoin issuers such as Gemini already boast of government regulation. There is no evidence that SEC regulation makes securities safer. Remember, the SEC regulated the infamous mortgage backed derivatives that blew up and sparked the Great Financial Meltdown of 2007-2008. However, SEC regulation makes investors feel better which can add value.
How the SEC could grow the Crypto Market
US equity markets, which the SEC regulates, are the world’s largest. For example, US equity markets were worth $44 trillion in the first quarter of 2023, SIFMA estimates. The US comprised 41.1% of the global equities market capitalization in the first quarter of 2023.
In contrast, CoinMarketCap estimates the Market Capitalization of all cryptocurrencies was $1.125 trillion on 22 May 2023. Hence, SEC regulated market cap is 44 times that of cryptocurrencies. Something that Bitcoin loving libertarians ignore.
Thus, you can argue that SEC regulation will cause a cryptocurrency boom as people see cryptos as a safe investment. In particular many US investment advisors will start recommending and selling cryptocurrencies if the SEC regulates.
Additionally, exchange traded and mutual fund companies could start adding more cryptocurrencies to retirement funds and individual retirement accounts. Accessing mutual funds could lead to tremendous growth for the cryptocurrency market.
There were around 8,000 mutual funds managing $21 trillion in assets in the United States in February 2021, Investopedia estimates. Moreover, the largest US mutual fund operator BlackRock had $9.090 trillion in assets under management (AUM) in 2023, the Sovreign Wealth Fund Institute estimates.
Hence, SEC approval could lead to the largest boom yet as Americans 401K and IRA money pours into the crypto market. Perhaps crypto speculators need to welcome SEC regulation.