If you’ve been paying close attention to the news, you may have seen that multiple class-action lawsuits have been filed against major companies like Binance, Tron, and Bitmex. The reason? For the most part, the lawsuits have been targeted at companies where investors believe that they have been cheated out of money by being sold unlawful securities, which were sold in the form of digital tokens. These types of legal battles often come with their own unique questions to ask and answer such as, when is a cryptocurrency considered a security and how do we classify these digital assets? Let’s take a closer look at how crypto is classified and how it may apply to your own assets.
First, When Is Crypto Not a Security?
The easiest way to approach this topic is to first identify what assets are not considered securities. According to some at the SEC, the only assets that may avoid being categorized as securities include major crypto assets like Bitcoin and Ethereum. While this doesn’t provide us with much to go on, this does help us to differentiate non-securities from assets that may be considered to be securities. The guidelines below will provide us with a further framework on which to base our assumptions as well.
Which Cryptocurrencies Are Considered Securities?
There are no clear-cut rules when it comes to classifying digital assets as securities. However, the SEC has provided some clearer guidelines that make defining securities a little easier for those who need to define their offerings. The guidelines help to identify potential securities if the asset meets the following criteria:
- The distributed ledger network and the cryptocurrency or token are both operational and completely developed. Simply put, users of the network can access and use the asset.
- The asset in question was designed for a specific use, rather than developed as an asset that is just subject to speculation.
- The potential for appreciation is limited (it is unlikely that the asset’s value will rise significantly in the present or in the future).
- If it is an asset that is marketed as being billed as a currency, it does operate as a store of value.
Of course, digital assets that have been tokenized but represent traditional securities are still securities, which can make it quite easy to identify some products that are out there.
The guidelines above are still just that, guidelines. However, they provide users with a clearer idea of which of these assets could fall under the definition of a security and which ones may not.
Another framework that is commonly applied to assets to better determine whether or not they’re securities is the Howey Test. In this test, three questions are asked to evaluate the status of digital assets:
- Was there an investment made with the expectation to profit in the future?
- Was the investment made to a common enterprise?
- Have any of the profits come as a result of the efforts of a third party or promoter?
Again, these guidelines (which were presented in a court case, SEC v. W.J. Howey Co.) are there to better help us determine whether or not a cryptocurrency could be considered a security. When you take into account all of the above information, it becomes clearer which digital assets fall outside of the guidelines and which ones clearly make the cut.
Whether you’re reevaluating your portfolio, looking to learn more about crypto, or starting your own cryptocurrency project, the brief guide above will help you learn more about digital securities and whether or not certain projects meet today’s standards.
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