Here is all you need to know about securities/non-securities, the cause of the SEC – Binance unending drama

Temitope Akintade
Level up your investment strategy with more security and accountability

Those that have been following the global crypto space recently would testify to the unending drama between the United States Securities and Exchange Commission (SEC) and the world’s largest exchange, Binance.

The SEC is not only going after Binance, it also charged another prominent crypto exchange, Coinbase. The bone of contention of all the discord is due to disagreements on whether certain digital assets should be classified under securities/non-securities.

The terminologies used in the world of finance could be too technical sometimes and to a layman, securities or non-securities are mere jargon. There are many questions currently swirling around in the crypto world on these issues, this explainer will shed more light on these topics.

What are securities/non-securities 

Basically, securities are negotiable financial instruments with monetary value issued by companies or governments, which are well-regulated.

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In simpler terms, a security is an asset that could be bought with money by investors, with an expected range of profits and that has a well-defined regulatory structure.

The United States SEC proposed the Howey Test to determine which offerings qualify as securities. This test posits that for a transaction or an asset to be classified as a security, it must involve an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Are cryptocurrencies securities?

Cryptocurrencies are largely unregulated, they do not fit into traditional asset classifications and their status as securities remain debated and unclear. 

Securities-and-Exchange-Commission

This is why crypto exchanges like Binance exercise caution to operate within the law in various jurisdictions. The usual bone of contention is that these laws and requirements differ from one jurisdiction to another which contributes to the complexity​.

While applying the earlier mentioned Howey Test to cryptocurrencies, you get mixed results. Regarding the investment of money and common enterprise, cryptocurrencies pass these criteria because investors use their money to buy crypto in an enterprise.

It however gets complicated when it gets to the point of expectation of profit and efforts of others. While an average investor aims to profit from cryptocurrencies, there is no outright guarantee that returns will come and they know this. Also, there are exceptions like stablecoins, which are used as a store of value, not for profit. This classifies them more as a currency

Cryptocurrencies do not pass the ‘effort of others’ test because market movements depend on market forces of supply and demand, not necessarily on the efforts of a common enterprise or third parties. This distinction separates them from securities, where the issuing entity’s efforts typically generate profits.

Despite all these, confusion still lingers over how cryptos should be labelled, which is the source of the lawsuits. One of the dilemmas is that some digital assets are considered securities while some are not. 

The US SEC declared that Bitcoin and Ether do not fall under the category of securities and this is largely due to their decentralised nature. 

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However, factors such as the specific details of the cryptocurrency, its underlying technology, and the jurisdiction evaluating it can influence the classification of a cryptocurrency as a security. So recently, the SEC identified a number of cryptocurrencies which included XRP, MANA, ALGO, Tron, Filecoin, Luna and many others as securities. 

The problem with cryptocurrencies being securities 

If a cryptocurrency is classified as a security, it becomes subject to the regulatory framework governing securities which include registration requirements, disclosure obligations, and other legal responsibilities designed to protect investors.

The complexity that comes with security is in contrast with the decentralised technology that backs cryptocurrencies. This is the source of the unending lawsuit between the SEC and crypto companies like Ripple, Binance and Coinbase. 

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Additionally, this unclear regulatory status of cryptocurrencies has made the idea of wide-ranging regulation seem unlikely because as long as they are unregulated in one jurisdiction, it is a huge challenge to argue for legal status in others.

Lastly 

Despite the regulatory challenges and uncertainties, the future of cryptocurrencies remains promising. As industry players and investors continue to navigate the complexities of this new digital frontier, it is essential to foster an environment that supports innovation in the nascent ecosystem.


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