The outlook for Bitcoin remains negative despite looming closures, while risk-averse assets like gold are on the rise. Today’s agenda focuses on the broader future of cryptocurrencies both in the U.S. and globally.
The U.S. Cryptocurrency Classification
The SEC’s new Chairman, Paul, made significant announcements on cryptocurrency classification today. Following Trump’s election, the SEC’s crypto-focused initiative, Project Crypto, started analyzing industry expectations, paving the way for future developments. The extent to which cryptocurrencies will be subject to federal securities laws will soon be clarified.
Historically, the Howey test was flexibly applied to prove cryptocurrencies as securities. A more advanced version of this test will now be applied to cryptocurrencies.
Significance of Classification
For years, the question of whether cryptocurrencies are securities has been a hot topic. The lack of a clear definition in federal securities laws added layers of chaos, causing significant issues in legal rights and treatments.
Paul reiterated that most cryptocurrencies are not securities. However, it’s possible for a token to be issued in a way that fulfills investment contract conditions, at least according to present securities laws.
Gensler and Paul differ here. An altcoin may initially fulfill investment contract conditions but isn’t required to remain so indefinitely.
This flawed view assumes every transaction following an investment is a securities transaction, conflicting with law texts, Supreme Court precedent, or common sense as stated by SEC’s chairman on November 12th.
The current perspective doesn’t favor the U.S. while imposing significant costs, and this has been openly expressed by the new SEC administration.
Classification of Cryptocurrencies
According to the new SEC Chairman, network tokens aren’t securities. These are functional and intrinsically linked to the workings of a decentralized crypto system, rather than expectations of profit from others’ efforts.
Secondly, NFTs aren’t considered securities. Gensler had previously referred to them as securities, but Paul clearly states otherwise today.
Traditional assets considered securities in the real world are still seen as securities when tokenized. Their crypto versions on a network don’t alter this classification.
Broadly, to correct the Howey test misinterpretations, Paul clarifies that while most crypto assets aren’t securities on their own, they can be part of or subject to an investment contract.
The Howey test fundamentally requires investing money in a common enterprise with expectations of profit from the efforts of others, based on issuer declarations or promises.
There should be clear terms regarding fundamental managerial efforts the issuer will uphold. The question is, “How can a non-security crypto asset separate from an investment contract?” Simply put, when issuers fulfill, fail, or terminate their promises.
For instance, the lands around Howey’s estate weren’t securities. Although initially part of an investment contract, this changed once the contract expired, even if businesses evolved over the land.
Commissioner Peirce notes that a project’s token launch may begin with an investment contract, but these promises don’t last forever. Networks mature, code is delivered, control is distributed, and issuers’ roles diminish, eliminating reasonable expectations of managerial efforts by one team.
Once an investment contract expires, token trading can continue, but such trades aren’t “securities transactions” linked to their origin story.
In summary, the shift from Howey test distortions to constructive, positive approaches marks a new era replacing SEC’s past tendency of leveraging crypto antagonism and trapping individuals.