SEC Classifies Tokens As Securities, Is Crypto Regulation Bad?
Cory Hymel
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August 16, 2022
The Securities and Exchange Commission (SEC) recently classified nine cryptocurrency tokens as securities in its newest insider trading case. Emphasizing investor protection, this SEC case means that regulation has now dawned upon the wild west of cryptocurrencies.
This stemmed from a case that the SEC filed against a former Coinbase employee who was allegedly engaged in insider trading. While still employed at Coinbase, he tipped off his brother and friend about crypto tokens that would list publicly in the near future. The SEC classified 9 out of the 25 tokens traded as securities.
The tokens regarded as securities were AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM. While there may be benefits of protection and curbing scams in imposing rules and regulations in the crypto industry, many existing participants in the space are being wary of the sudden nature by which the regulations sprung, as well as the implementation of arbitrary rules that are not applicable with blockchain technology. Is crypto regulation bad? And can we really have regulations while still allowing free business enterprise?
This is not the first time the SEC pointed to crypto as securities. The agency previously filed a lawsuit against blockchain firm Ripple over its native XRP token, classifying it as a security. They alleged that Ripple, the issuer, did not report before issuing and profiting from XRP, which was the third biggest crypto token at the time.
By January 2021, XRP was delisted by Coinbase. The current insider trading case was the first time the SEC filed charges not against the issuers of the token “securities”, but towards the traders. If the nine token securities were issued – based on the case versus Ripple – then why are the issuers of the nine tokens not charged? And without a previously discussed and approved set of rules, the SEC began randomly pointing to some crypto assets as securities. These inconsistencies post some concerns from the overall crypto industry.
Many in the crypto community see this SEC action as “regulation by enforcement”, which have problematic implications beyond this case. The newest SEC case came after US President Joe Biden signed an executive order calling on government agencies to have a more coordinated approach to the oversight of crypto.
From that EO signing, the SEC only looked to its traditional rules to bring all digital assets into its jurisdiction. Instead of creating tailor fit rules and regulations in an inclusive and transparent way, the agency negligently relies on its rules to determine whether or not crypto assets are classified as securities. (Earlier, they determined that Bitcoin and Ethereum are not securities, but are utilities and commodities as they serve as digital currencies that can be traded easily and a gateway for other innovations.)
Crypto enthusiasts and participants argue that an old set of rules cannot cover an entire advanced and decentralized technology such as crypto and blockchain. They added that there must be proper and open discussions and consultations between the government and industry, and a whole process dedicated to shaping the regulations fit for digital assets using the blockchain network. Moving forward, the crypto and blockchain world, as well as the business enterprises wanting to enter the space, must observe the unfolding of the events concerning the SEC cases as this can be pivotal on how digital assets such as cryptocurrencies can be classified and treated by government regulations.
There is a move by the Senate to put Bitcoin and Ethereum under the regulation of the Commodity Futures Trading Commission (CFTC), an agency governing commodity trading and their derivatives whose primary focus is protecting producers and farmers against risks of price swings.
Crypto backers argue that the CFTC, which has done some crypto enforcement actions, is better positioned than the SEC to regulate crypto assets. Opponents of that approach say that the SEC’s securities-focused rules offer more protections for mom-and-pop investors. Whether it is the SEC or CFTC that will oversee the crypto world, or an entirely new agency to be formed, it should factor in the protection of investors and also issuers, exchanges, and other crypto firms.
Other countries are also taking steps to protect participants in the crypto world. In the United Kingdom for example, digital assets are considered investments that come with rights to repayment or a share in profits. “Payment tokens” like Bitcoin and “utility tokens” that provide access to a service are yet to be regulated.
In Singapore, coins that are digital representations of other assets are regarded as securities, while in Europe, they have reached a provisional agreement imposed on 27 member countries and to develop a law framework that will help regulate crypto in the region. Bottom line, crypto regulation is not bad. The regulations just need to fit and be fine tuned in the nature of crypto and blockchain technology. No matter how crypto regulations will fare moving forward and which agency will take charge in its oversight, it is critical to craft a tailored set of rules and regulations specific to crypto and blockchain.
There needs to be a balance and fair protection for everyone – not only to protect investors from risks, but also to support issuers, exchanges and other crypto companies that will aid the free flow of business enterprise in the world of Web3. The government is shining a spotlight on crypto, blockchain and Web3 and recognizing its power and impact on the public. This means that Web3 is on its way to mass adoption and it is here to stay. Regulations may feel restrictive, limited and demotivating at first, but the right rules and regulation will be beneficial in globally accepting blockchain technology for everyday life, and will result in a safer and secured decentralized environment for everyone.
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