The U. S. Securities and Exchange Commission (SEC) has recently acknowledged the emerging state of confusion regarding its position on cryptocurrencies’ securities. It was made after years of enforcement actions and regulatory guidance that put the crypto industry into turmoil.
However, the SEC persists in the regulation of digital assets, the agency underscores the difficulties of market participants in the identification of the uncertainties concerning what is a security token in the context of crypto instruments.
SEC’s Confusing Position on Crypto Securities
The SEC’s authority as related to cryptocurrencies has been a subject of discussion for quite some time now. While some of the digital assets are categorized as commodities, others are considered to be securities, thus complicating the work of many crypto projects.
Due to the absence of clear international guidelines on how to differentiate between these categories, there has been a number of litigations and a tidal wave of confusion in the market.
In its latest statement, the SEC has said, ‘We understand and are sorry for the confusion caused to the industry’. The agency said it was keen to make sure that investors were safe and at the same time promote innovation. But, it accepted to admit that its actions may have put a haze on what should be regulated under its statutes and which are not.
Howey Test: The Key to Crypto Securities Identification?
The SEC has often used the Howey Test which is a legal ruling made in 1946 in order to decide if a crypto asset is a security. The test is about the likelihood that a stake of money is risked with the view of gaining profits through other’s work. If an asset fits this description it is classified as a security.
Even though this test has been used as the main one by the SEC in relation to the classification of the securities, there are some issues with its application in the case of decentralized and actively developing cryptocurrencies. Howey Test is derived from a conventional financial environment and was never designed to contemplate on digital currency which makes its adoption by the crypto sphere quite complex.
Ripple Case: A Turning Point?
One of the longest and most publicized legal cases in the cryptocurrency world is the Ripple case. Lastly, the SEC brought an action against Ripple Labs Inc in which it claimed that XRP was a security that had not been registered. While Ripple continues to argue that XRP is a currency which should not fall under the securities laws.
This case presents a major effect to other broader cryptocurrency markets since the result that is going to be set in this case may have an authoritative effect of the law so as to how other types of digital currencies are going to be categorized. Needless to say, the lawsuit has brought to light the necessity of legal time for XRP as well as all other cryptocurrencies operating in the United States of America.
The main critique of the SEC has been that it engages in enforcement from individual projects instead of developing and providing the general rules and guidelines for adoption to the entire crypto market. They argue that the enforcement by litigation approach yields behavioral unpredictability and stifles development.
Need for Regulatory Clarity
The SEC’s recent statement gives an indication of moving halfway towards solving the problem of defining crypto securities. Although the agency vowed to continue with enforcement of securities laws, it has also said it would be willing to engage players in the market to work out more transparent rules.
The voices for regulation also rise louder as more and more companies, investors and even legislatures demand for that elusive framework that is needed for the U. S. to remain at the top of the crypto market. There have been a number of new bills proposed in Congress to better clarify what constitutes a crypto asset, new legislation that would prescribe a new form of regulation for such assets.
America’s securities markets regulator, Securities and Exchange Commission SEC Chair Gary Gensler has particularly expressed concern in protecting investors in the virtual space. He has elaborated that many of the digital assets can be considered as exhibiting features of securities and needs to be regulated as such. Yet, Gensler has also admitted that the complicated part is how best to enforce existing laws on an evolving and fast-growing industry.
