A seemingly technical issue could shape the future of cryptocurrency.
Hi, girls and boys, welcome to Uncle Cat Talking about Coins!
The debate over cryptocurrencies is coming down to an extremely thorny legal question: whether digital coins are securities.
● If coins are securities, then they are subject to a host of U.S. regulations, including those regarding financial disclosure and investor protection. The same goes for the exchanges where people trade them.
● If you’re into cryptocurrencies, you probably think of the tokens in your e-wallet as being a lot like stocks in your online brokerage account. You buy these tokens in the hope that their price will go up. You open an app on your phone and watch their market value rise or fall, then look at a wild chart of their price history, just like you do with Apple stock. These tokens all have shorthand names — BTC, SOL, ADA, MATIC, DOT — that look like stock symbols.
● Not all investments are securities. A gold bar, a barrel of oil, a 1989 Ken Griffey Jr. rookie baseball card can all be considered assets, but they are not securities. They don’t fit the legal formula: an investment in a business whose expected profits come from the efforts of others. Ken Griffey Jr. cards may rise or fall depending on the tastes of baseball card collectors, but Apple’s stock price depends on whether Tim Cook can get the new iPhone right.
● Further stripping away the legalese, Bloomberg News reporters Lydia Beyoud and Allyson Versprille write that “under U.S. rules, whether something is a security depends on how much it looks like shares issued by a company raising money.” The SEC has said bitcoin is not a security — for one thing, no company or individual is issuing new bitcoins to raise cash. But it argues that many other tokens do meet the test.
● The SEC points out how token developers sell tokens to fund blockchain projects, and how they make tweaks and upgrades to make the tokens more popular and valuable. Sometimes, creators “burn” tokens — reducing supply and helping to drive up prices. In this way, the value of a token and the actions of its developers appear to be tied together.
● Paul Grewal, chief legal officer at Coinbase Global Inc., testified to Congress that decentralization gives tokens a life of their own: They can thrive even if the original developers leave the project, which is not the case with stocks. Many coin creators argue that they are simply designing "utility tokens" - coins designed to be used with their technology. For example, a coin might also be an in-game currency.
● Beyond the lawyers’ debate, the securities issue highlights a larger question: How did cryptocurrencies suddenly enter the retail market and attract millions of traders without much of the oversight and disclosure that U.S. investors are accustomed to? Most agree that it hasn’t been going well.
In fact, the core factor of whether cryptocurrency can become a security lies in whether it can be effectively regulated like a security. I mentioned a long time ago that the decentralized freedom of the crypto world is in conflict with many people in power. Whether to have freedom or a more benign market after regulation is a question that everyone should think about!
