Should Crypto be declared as a commodity or security?
What is a Crypto?
Firstly, crypto or cryptocurrency is any form of currency that exists digitally or virtually as well as, uses cryptography to secure transactions.
Secondly, crypto does not have a central issuing or regulating authority, instead, it uses a decentralized system to that record transactions and issue new units to put simply.
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Background of Ripple Crypto case?
Firstly, the crypto industry waiting anxiously for the decision of Judge Analisa Torres of the Southern District Court of New York.
Basically on the Securities and Exchange Commission (SEC) versus Ripple Corporation case.
Chiefly, the SEC charged in December 2020 that “Ripple raised funds, beginning in 2013.
Mainly, through the sale of digital assets known as XRP in unregistered security offerings to investors in the U.S. and worldwide.
Furthermore, Ripple also allegedly distributed billions of XRP in exchange for non-cash consideration. For instance, labor and market-making services.
Moreover, the XRP Token is currently still in the top 10 tokens on coinmarketcap.com. Basically, it is a token-tracking site.
Chiefly, XRP is essentially an open-source, decentralized digital asset built for payments simply put. Further, it is native to the XRP Ledger. In fact, Ripple and XRP are separate entities.
Effect of the Ripple case on the Crypto Industry
Firstly, this case goes beyond the survival of Ripple anD XRP. Actually, it lays the predicate for the SEC to charge many other cryptos as securities to put simply.
Secondly, the trading of commodities like sugar, wheat oil, and gold is governed by the Commodity Futures Trading Commission ( CFTC).
Additionally, much of the crypto industry would prefer to see itself regulated under this regime.
Further, the price of crypto depends on buyer versus seller sentiment driven by a variety of factors such as individual token news.
In addition, macro factors like inflation and employment also influence other commodity prices.
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What Are the factors responsible for the price of a Crypto?
Generally, when there is excess liquidity, quantitative easing, money overprinting, as well as, high M2 supply, etc. the price of crypto goes up.
Inversely, the price of crypto may tend to go down when you have high inflation with quantitative tightening and higher interest rates. Further, if Central Banks (including Fed) use to try and reduce inflation to put simply.
If Crypto is declared as a Security?
Chiefly, if crypto is declared as a security, however, it could be subject to added reporting requirements.
For instance, annual reports, profit and loss statements, and environmental, social, and governance (ESG) reports.
Additionally, there are some tokens that have decided to register with the SEC as a security.
Clearly, this move is extremely popular with most token issuers in the industry.
XRP Controversy
Firstly, the XRP case has been mired in controversy from the start because of well-reported public statements by former Chairman Jay Clayton stating that both Bitcoin and Ethereum are not securities.
Secondly, according to him Bitcoin and Ethereum are more commodities like sugar, oil, gold, and the like.
Additionally, when current SEC Chairman Gary Gensler who is a former MIT Professor in blockchain technology, took over, the mood changed.
Further, Gensler is more inclined now to consider many cryptocurrencies, with the exception of Bitcoin, as securities.
Crypto – Howey Test
Firstly, The Responsible Financial Innovation Act introduced on Jun 7, 2022, includes a comprehensive regulatory framework for digital assets.
It further, seeks to provide clarity on how digital assets, such as cryptocurrencies, are treated under US securities law.
Mainly, the lynchpin of the bill is the codification of the US Supreme Court’s decades-old standard for determining when a financial offering is a “security,” i.e., the Howey test.
Chiefly, in US Jurisprudence, the way to determine if something is security or not is something called Howey Test.
Mainly, the SEC versus the WJ Howey Company was a case involving an orange plantation in Florida that was decided by the Supreme Court in 1946.
Chiefly, the Supreme Court basically gave 4 criteria for something to be deemed as a security.
Thereby, the 4 elements are as follows :
- An investment of money
- is a common enterprise
- with expectations of a profit
- to be derived from the efforts of others
Typically, crypto involves the first 3 considerations. First, people use their money to buy crypto.
Second, the tokens could be called a common enterprise because the token generally has a particular objective.
Third, most people who buy crypto want to make a profit. So, what’s the hold-up?
Basically, the tricky part is the 4th condition. Which typically states that most investors of securities rely on a particular group of people such as the management of the company.
Further, which owns the security to ensure that profit results from their common endeavor.
For example, Bitcoin was started by Satoshi Nakamoto, which is a pseudonym for possibly one or even a group of people.
Mainly, we don’t know who this person (or persons) is and where he/they are domiciled at. So how can he/they be held to account if we do not even know who is in charge?
In addition, a new type of organization called a Decentralized Autonomous Organisation (DAO) has sprouted up.
Further, people with a particular token pool their resources in a DAO and decide collectively how to move forward to achieve objectives.
But since the ownership is decentralized, condition 4 of the Howey Test becomes tricky. Particularly, difficult to determine.
Additionally, this is exacerbated by the fact that many people in crypto also use aliases and pseudonyms.
Still, Gensler won’t back especially, it will most likely change when the US Congress decides on clear laws to regulate the growing crypto sector. But it is challenging because many do not understand what crypto and blockchain are.
Essentially, elected officers in the US have very polarized positions on how it should be handled. Some want to ban it, while others want the U.S. to keep a global leadership role and only want to regulate it.
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Conclusion
Ultimately, whatever Judge Torres decides won’t necessarily derail the progress of crypto and blockchain into our everyday lives.
In fact, clearly defining whether crypto is a commodity or security would clarify the way for tokens to proceed moving forward.
Hey ! Folks, what do you think about this issue?
Do comment and share your views.
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FAQs
Is Ethereum a commodity or security?
Is the crypto token security?
What is security vs commodity?
What category does crypto fall under?
Why is crypto not a security?
What happens if crypto is secure?
Is crypto more secure than stocks?
Is Ethereum a commodity or security?
According to the CFTC, filing, ETH is a commodity.
Is the crypto token security?
Firstly, not all cryptocurrencies are securities, but many are. For instance, Web3 projects launch security token offerings that meet the Howey Test criteria. Therefore, the SEC would like them to comply with securities laws.
What is security vs commodity?
In layman’s terms, security produces a return from a joint enterprise or company. Commodities are typically “basic goods” that can be bought, traded, or exchanged—for instance, gold, grain, etc.
What category does crypto fall under?
According to IRS Notice 2014-21, the IRS considers cryptos as “property” and is given the same treatment as stocks or gold.
Why is crypto not a security?
Chiefly, the SEC’s primary theory on whether a crypto asset is a security appears to be based upon whether the blockchain project associated with a crypto asset is, at any point in time, “sufficiently decentralized “. If so, the crypto asset is not a security.
What happens if crypto is secure?
If crypto is “security” then crypto companies issuing them must comply with Securities and Exchange Commission rules for registration and reporting. Further, failure to do so can lead to significant penalties, such as the $100 million SEC fine issued by the SEC in 2021.
Is crypto more secure than stocks?
Firstly, stocks provide stability. Further, they have been the go-to investment to build wealth for individuals and organizations for most of the 20th century and into the 21st century.
Cryptocurrency is a riskier investment. Additionally, it offers the chance for big rewards but at a higher risk.
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