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What are Unregistered Securities, and Why is Bitcoin Not One?

Last Updated June 26, 2023 10:20 AM
Teuta Franjkovic
Last Updated June 26, 2023 10:20 AM
Key Takeaways
  • SEC has disclosed a significant increase in employees for its crypto-law unit
  • SEC enforcement has already been used against numerous cryptocurrency issuers
  • SEC Chair Gary Gensler has urged crypto exchanges to register as securities trading platforms
  • Bitcoin is not among the cryptocurrency tokens that are subject to increased regulatory scrutiny

The crypto sector was left perplexed after recent legal measures taken by the SEC against Binance and Coinbase regarding so-called unregistered securities, as well as coins not considered securities, like Bitcoin and Ether.

Last week, Robinhood disclosed that it was removing Cardano, Polygon, and Solana  from its platform. That is the most recent repercussion of the SEC’s operations, which include charges brought against prominent cryptocurrency exchanges Binance and Coinbase for the selling of unregistered securities.

However, what are registered and what are unregistered securities? What’s the difference between securities and commodities? And, why does SEC’s Chair Gary Gensler say Bitcoin is not a security ?

Registered vs. Unregistered Securities

The SEC has used a 1946 decision by the U.S. Supreme Court in support of their claim that cryptocurrency assets are securities. The case was about W.J. Howey Co-owned orange groves where investors have put their money in

According to the court at the time, an investment contract was a type of security defined as “an investment of money in a common enterprise with profits to come solely from the efforts of others.”

The legal case SEC v. W.J. Howey Co. is referred to as the “Howey Test .” There are three questions in it:

  1. Is money invested with the hope of making money in the future?
  2. Is investing money in a business a shared enterprise?
  3. Do any earnings result from a promoter’s or third party’s efforts?

The court ruled that the SEC had the authority to try and stop Howey from selling fractional land interests to investors from outside the state with a promise to share in the harvest’s profits.

Federal law mandates that securities that are offered for sale be publicly registered with the SEC and comply with certain disclosure standards, unless an exception has been granted. According to legal experts, the act is mainly intended to safeguard investors so that they can better comprehend the products they are purchasing. The registration is also intended to stop fraudulent practices like lying and misrepresenting, which are illegal.

Investors may lose levels of protection if a security is not registered, including the ability to detect a clear money trail and determine whether an investment has failed.

Investors were forewarned by the SEC in March that no organization related to Bitcoin, Ether and other crypto assets had been registered with the watchdog as a national securities exchange. Additionally, because cryptocurrency was not traded on any of the major national securities exchanges, such as the New York Stock Exchange or the Nasdaq, investors were at risk of front-running, manipulation, and other sorts of dishonest behavior.

That doesn’t imply that cryptocurrency businesses haven’t shown interest in the registration procedure. According to Coinbase, the issue was that the SEC wouldn’t permit it to register, claiming a lack of regulatory direction.

Be it as it may, the truth is that there are still no specific instructions on how to register these exchanges or cryptocurrencies, let alone how they must adhere.

Securities vs. Commodities

In the United States, commodities and securities are two quite different types of financial instruments that are governed by two different government agencies. The legal classification of a cryptocurrency as one of those financial instruments has significant ramifications for how it may be marketed, where it can be listed, and who might file a lawsuit if an issuer crosses the line.

Given the scale of the cryptocurrency market, it is likely that there won’t be a judgment that applies to all tokens; rather, the answer will vary based on the token.

Securities are financial instruments, such as stocks, bonds, and derivatives, that reflect a claim against the issuer and are governed by the Securities and Exchange Commission (SEC).

Contrarily, commodities are tangible things that are traded in large volumes on exchanges. These can consist of both precious metals like gold and silver as well as agricultural items like corn and wheat. Usually, commodities are traded according to their current market value. The Commodity Futures Trading Commission (CFTC), which oversees certain commodities trading violations in the United States, does not yet have comprehensive regulatory authority over spot trading, similar to the SEC’s authority over securities.

Why Bitcoin and Ether Are Not Securities, According to SEC?

Since its inception, the Commodity Futures Trading Commission (CFTC) has claimed that cryptocurrencies like Bitcoin and Ether can be regulated as commodities  under the CEA.

The CTFC’s central claim is that because a cryptocurrency like Bitcoin can be traded for another cryptocurrency on exchanges, it is a commodity because each Bitcoin has the same value as another Bitcoin of the same grade. This conclusion was confirmed in the CFTC’s action against the stablecoin issuer Tether  and the cryptocurrency exchange Bitfinex. The organization claimed that “digital assets such as bitcoin, ether, litecoin, and tether” are all commodities in an October 2021 filing.

Rep. Patrick McHenry predicted in April 2023 that the United States would have a cryptocurrency bill (that will include both Bitcoin and Ether) in two months that would address both securities and commodities issues. He recently submitted a bill  that calls for a more distinct division of responsibility between the SEC and the CFTC with regard to cryptocurrency issues.

It would open up a registration process and specifically permit the trading of cryptocurrency securities on alternative trading platforms, both of which would fall within the SEC’s jurisdiction.

Gary Gensler, the chairman of the Securities and Exchange Commission, has stated that he believes his organization has the ability to regulate cryptocurrency and that “most crypto tokens are securities,” however he declined to say whether or not Ether was a security  during a controversial hearing in April 2023.

In 2018, however, he said: “Bitcoin. Ether. Litecoin. Bitcoin Cash. Why did I name those four? They’re not securities.”

The SEC withdrew the definition of “digital asset” from the final draft of a hedge fund rule in May 2023, stating that they are “continuing to consider this term” at the moment.