What are securities and why are cryptocurrencies called so?

1 What are the criteria something is considered a security?

In order to understand what a security is in the United States, we must take into account an element called the Howey test or test. This is used to determine if a financial asset is a security, so it must be registered and subject to the Securities Act (1993) and the Exchange Act (1994).

The Howey test was created from the case of the Howey Co (1942), which sold citrus groves to its Florida customers for them to subsequently lease out the land. The buyers didn’t need to take care of the land or know anything about farming, because the Howey workers had to take care of the land.

Through an agreement both parties (investor and company) will share the profit. For the US Securities and Exchange Commission (SEC), this transaction was classified as an “investment contract”, so it had to be registered with the authorities.

The case went all the way to the U.S. Supreme Court, where it was found that the leases were securities. Taking this case as a model, the US court proposed a definition of securities, which says that if there is an investment of “money in a common enterprise with a reasonable expectation of benefits that will be received from the efforts of others,” we are in front of security.

The Howey test, in turn, has four general criteria for determining whether an asset can be considered a security or not. This:

Another characteristic feature of a security is that, unlike other assets, they are in themselves a property right. I mean, In order to sell a security, an investor must have it in his possession.. This makes every trader the custodian of their financial product, known in the bitcoin world as a holder.

For those who still find it difficult to understand what a security is with the Howey test, they can also be guided by all these assets. They are NOT securities to understand the criteria for selecting regulators. For example:

2 Do cryptocurrencies meet security criteria?

This question causes a lot of controversy. On the one hand, regulators such as the SEC argue that some cryptocurrencies and tokens behave exactly like securities, so they must be regulated in their jurisdiction.

However, developers and managers of projects labeled as securities (such as Solana, Polygon, and Ripple) point out that their crypto assets are in fact currencies or commodities, so they should not be valued in the same way as the company’s actions.

To better understand this contradiction, we must take into account several details. The first thing to recognize is that while we usually refer to any crypto asset as a “cryptocurrency”, Not everything traded in this market is “currency“.

While we have cases like bitcoin, ether or zcash just to name a few that have been created and function as digital currencies. Other assets such as tokens have multiple use cases and may have similar characteristics to what we discussed as security.

To better understand the difference between a cryptocurrency and a token, we have this article from cryptopedia where we delve into both markets. But in general, what you should know is that tokens can represent company sharesproject financing and even commercial drawing on the Internet.

In this sense, let’s evaluate the general characteristics of a cryptocurrency, a token, and a security to see if they are similar to each other.

In addition to the features mentioned above, it is important to note that many cryptocurrencies and tokens are used as instruments for investment and speculation.. In particular, there is no shortage of investors who buy a project token, waiting for the company to increase its value and funding.

In this sense, these tokens fall under the definition of an SEC-administered security, which assumes that any financial instrument acquired for profit at the expense of a third party is a financial security.

3 What are the implications of cryptocurrencies being secure?

Experts note that the first change that will result in some cryptocurrencies being classified as safe is that new rules will apply to them.

All exchange-traded securities are controlled and regulated by the financial authorities of each country, especially to avoid market manipulationprotect investors from fraudulent activities and provide them with all the necessary information before making an investment.

If cryptocurrencies such as XRP, MATIX or ADA are accepted as collateral, they will have to comply with the rules governing the stock markets of the country in which they are located. In the specific case of the United States, which supports this measure, these assets will now be monitored by the SEC and subject to sanctions if they deem it necessary.

It is expected that in the long term may lead to increased spending on exchanges and trading platforms. Companies will have to register all of these coins with the Securities and Exchange Commission in order to be able to trade such assets, which means administrative paperwork that will increase transaction costs. Similarly, they will be more exposed to fines and litigation than when dealing with other types of assets.

As for the price of assets, although many of them may be tokens and cryptocurrencies used in different parts of the world, this style measure can affect their price. With the first statements from the SEC on this matter, there have already been strong price movements.

4 What is the role of the SEC in regulating cryptocurrencies?

While it’s too early to tell the role the US Securities and Exchange Commission will play in the cryptocurrency ecosystem, we do have some clues as to its long-term behavior. However, the first thing to keep in mind is that He Role of the SEC will focus on the US cryptocurrency market

This regulator is only legal in North America, so how cryptocurrencies are regulated and classified will vary by country. However, this does not mean that the decisions made by the US government will not have an impact on the cryptocurrency market.

In this sense, we can say that The main role played by the SEC today in regulating cryptocurrencies is to oversee companies that offer services in this market. For example, exchanges, stablecoin companies, lending platforms, and others. Any firm with a presence in the US that provides cryptographic asset services to citizens of that country must maintain a close relationship with the regulator.

If it is later confirmed that certain cryptocurrencies, such as the Cardano network, Polygon or Solana, are definitely securities; then you can add another level of complexity. The SEC, when this categorization is confirmed, will become the body responsible for regulating and overseeing any operation carried out by these networks on American soil.