By Jack Copenhaver Photo Credit: CryptoNews
Since 2017, the SEC (Securities and Exchange Commission) has consistently attempted to regulate the cryptocurrency sector. In 2021, Gary Gensler, the former Chair of the U.S. Commodity Futures Trading Commission, took over as Chair of the SEC for Jay Clayton. Gensler focused the SEC’s aim towards crypto exchange platforms, as he believes that a significant amount of crypto markets are operating outside of the regulatory framework. Since the beginning of Gensler’s term as Chair, the SEC has filed 55 enforcement lawsuits over cryptocurrencies.
The definition of a security has been historically determined using The Howey Test which derives from the 1946 Supreme Court Case SEC v. W.J. Howey Co. The Supreme Court determined that a security is an investment contract, transaction, or scheme where a person invests their money into a common enterprise and is led to expect profits solely from the efforts of a promoter or a third party. Under current regulations, cryptocurrency is treated as currency, but Gensler says almost all crypto products are securities under The Howey Test.
Gensler is critical about the security of cryptocurrency; he was quoted in in July 2023 saying “We’ve seen the Wild West of the crypto markets, rife with noncompliance, where investors have put hard-earned assets at risk in a highly speculative asset class.” In December 2022, FTX founder and CEO Sam Bankman-Fried was arrested on charges including wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering. Bankman-Fried’s conviction in November for stealing billions of dollars from customers supports the SEC’s concern for the security of cryptocurrency, and has caused skepticism from potential investors.
Crypto supporters argue that digital assets differ from stocks because while they can vary in value, they don’t promise dividends or votes to elect a board of directors. Coinbase is a company that allows people to buy, sell, transfer, and store cryptocurrency. According to Coinbase’s legal team, creators of a cryptocurrency don’t promise to share “the profits, income or assets of the issuer’s business.” Coinbase argues cryptocurrencies are commodities and not securities, and are currently lobbying for Congress to create a different regulatory framework for their assets that would protect investors without the oversight of the SEC. On the other hand, the SEC claims that cryptocurrencies could be securities even if they don’t promise a share of the profits, or an ongoing promise from management to boost their value.
Recent court cases have upheld the opinion of the SEC, but the SEC is currently attempting to appeal a major court decision from 2023 in which U.S. District Judge Analisa Torres ruled in favor of the financial firm Ripple, which sold over $1.4 billion of a digital currency known as XRP. Torres is the U.S. District Court Judge for the Southern District of New York and was nominated by former President Barack Obama in 2013. The SEC argues that institutional investors who bought XRP were counting on Ripple to boost the value of the currency, but Torres found that individual investors who bought XRP on digital asset exchanges were unaware they were buying from Ripple. Torres claimed that around half of Ripple’s XRP sales didn’t constitute an illegal sale of securities while the other half did violate investor-protection laws.
Following the ruling by Judge Torres, XRP rose in value by 70% which was a sigh of relief for many crypto supporters. Stuart Alderoty, Ripple’s general counsel, said of the Torres decision, “It has broader implications for this SEC’s exchange strategy to try to suffocate the crypto economy in the U.S.” Currently, the cryptocurrency market stands at a value over $2.5 trillion, and major exchange sites like Coinbase have the ability to push back on cryptocurrency regulation if a case makes it to the Supreme Court. While it’s unclear how the court system will continue to define or redefine cryptocurrency in the coming months or years, both sides have an incentive to support their argument throughout the process.