What can you do with cryptocurrencies categorized as securities?
What are the uses of security cryptocurrencies?
Author: Daniel Kuhn, CoinDesk; Translation: Songxue, Blocking
According to the latest statistics, the enforcement arm of the US Securities and Exchange Commission (SEC) has classified at least 68 cryptocurrencies as securities. The list includes “blue chip” tokens such as Solana’s SOL and Cardano’s ADA, as well as dozens of other assets with various utilities. The SEC actually says that cryptocurrencies with a total value of over $100 billion (approximately 10% of the total market value of cryptocurrencies) are being illegally traded.
Not to mention SEC Chairman Gary Gensler, who has made it clear that almost all cryptocurrencies are within his jurisdiction, except for Bitcoin (BTC) and perhaps Ethereum (ETH). Would it be better if the second largest blockchain’s primary asset by value and the top network by number of active users were more clear? Obviously. Although Gensler protests that the rules are clear, the regulatory status of cryptocurrencies cannot be determined at present – at least not in the United States.
One reasonable question to ask is: What can users do with cryptocurrencies that are classified as “securities”? To some extent, if the blockchain is truly “decentralized enough”, then regardless of legal regulations, users should be able to trade their cryptocurrencies and use their open source code. After all, these are stateless self-configuring networks. So what can users do with cryptocurrencies that are classified as securities? Anything could be done with cryptocurrencies before they were declared securities.
However, this understanding would ignore the fact that many cryptocurrency users around the world access these networks and use centralized exchanges and their services to purchase these assets. Centralized exchanges and service providers generally have to comply with regulations. If users cannot operate cryptocurrencies, then discussions about “stateless configured cryptocurrencies” and open access are meaningless to many people. So what can users do with cryptocurrencies that are classified as “securities”? Anything or nothing, depending on the restrictions set by the SEC.
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According to Drastic, the general counsel of Bakkt, a compliant and reward-friendly trading platform, classifying cryptocurrencies as securities has two main implications: it affects the information disclosure that companies need to provide to potential investors and the way assets are traded. This may limit the types of platforms that can legally offer assets, such as registered broker-dealers, securities exchanges, and other trading systems, as well as whether “qualified investors” can trade cryptocurrencies.
“We do not believe that classification will significantly affect the use cases of these cryptocurrencies,” D’Annunzio said in an email. However, it is clearly important whether companies like Robinhood, Coinbase, and eToro want to provide access to cryptocurrencies and whether they can do so legally. Here, it may be worth rephrasing the question: are we moving towards a world where US citizens cannot trade ADA or SOL?
As previously mentioned, these are the two tokens named as securities in recent lawsuits by the SEC against Coinbase and Binance, as well as two tokens that some (but not all) trading platforms have decided to delist. At least in my view, Solana and Cardano are considered decentralized like most other blockchains, but the trading of SOL and ADA may be subject to strict restrictions in the US.
In 2020, the SEC filed a lawsuit against Ripple, a company entity that may be most closely related to XRP. The SEC accused XRP of being a security and Ripple of illegally selling tokens worth over $1 billion. The SEC’s argument is essentially that XRP qualifies under the so-called “Howey test,” one of the standards for determining whether an asset is an “investment contract” established in the 1930s. If an asset is an investment in a regular business and is expected to profit from the efforts of others, the asset passes (or fails, depending on your point of view).
According to this definition, cryptocurrencies generally look at least similar to securities. To be honest, most people buy cryptocurrencies because they hope to profit from the success of some network or application built and maintained by others. Even if tokens typically have other utilities (or, in the case of non-fungible tokens, “intrinsic value” associated with art), this is unavoidable.
However, in many cases, the use of cryptocurrencies is not just speculation, and there are many reasons to consider the novel properties of cryptocurrencies that distinguish them from traditional assets such as stocks, bonds, and exchange-traded funds.
What is important here is that after the SEC said XRP was a security, most US exchanges delisted the cryptocurrency. If you look at CoinMarketCap today, you will find that XRP is still performing well. Three years after the SEC first sued Ripple, it became the sixth largest cryptocurrency by market capitalization. Although you will notice that almost all XRP trades are conducted on offshore exchanges-except for the negligible trading volume on Kraken in the United States.
To some extent, if any cryptocurrency is deemed a security, this might be the most obvious example you could expect: given the current exchange ecosystem, US users may not be able to access it, but it can be traded around the world using a Bithumb, Bitstamp, or KuCoin account (in the US, if you have a VPN). Savvy readers might note that I excluded Binance, the largest exchange by far in the US to date, not only because it is currently being sued by the SEC, but also to make the next point.
Today, Binance’s XRP trading activity is greater than the sum of all other exchanges combined (though there are also a lot of wash trading transactions if the SEC is to be believed). However, if Binance didn’t exist, that trading activity would move elsewhere. Blockchains are open, and their cryptocurrencies are always able to be traded peer-to-peer with the right technology, so people will always try to find an easy way to make these cryptocurrencies available if there’s enough demand.
I’d go further and say that even in the catastrophic situation where every country on Earth banned cryptocurrencies, this could still be the case, for many reasons—including recent regulatory developments in Europe and Hong Kong, as well as game theory. Some country somewhere might want to be the sole regulator of a lucrative industry—that’s not going to happen. It’s more likely that some regions will be crypto-friendly while others will be hostile to cryptocurrencies, so cryptocurrencies will always have a home.
The regulatory uncertainty around cryptocurrencies is partly due to the fact that the industry’s most important feature is the dissemination of technology. Because some aspects of cryptocurrencies function like infinite natural resources (such as mining coal or bending rivers), many people feel that the entire industry should be unrestricted by regulatory bodies or treated like commodities on Earth and placed under their jurisdiction.
For example, Bakkt acquired a broker-dealer entity in early 2023 because it “is useful for issuing tokens that have been deemed securities,” D’Annunzio said. Several other companies have taken similar approaches, including BitGo and Coinbase. These licenses satisfy some of the regulatory guidelines that the SEC has long called for, but they are not a complete solution to all the regulatory uncertainty surrounding cryptocurrencies. Who exactly should draft risk disclosures for cryptocurrencies? Is it SOL’s validators or the Solana Foundation?
Cryptocurrency lawyer Gabriel Shapiro believes that cryptocurrency is essentially a share in a collectively owned (by token holders) and operated (by miners or validators) nonprofit corporation. He writes that cryptocurrency is “the closest thing to equity in a network owned by no one.” However, cryptocurrency is completely different from stocks and the like, as the technology is always open in design. There may be rules that limit the ability of entry to provide trading services, but the network itself is unregulated.
“In determining which tokens may be securities, the US Securities and Exchange Commission seems to have a loose interpretation of the Howey test,” D’Annunzio said. “Although these issues may ultimately be resolved through litigation or federal legislation, the SEC’s view is certainly relevant in the current context.”
