The regulatory battle grounds
In our March 13th article we mentioned that XRP and NEO may be regarded as securities. Subsequently on 23 April former CFTC chairman Gary Gensler said that Ethereum may be classified as a security. With that statement the demarcation line between commodities (e.g. Bitcoin) and securities (e.g. XRP) may have moved. In this article we rank the top 17 blockchains on the likeliness of being deemed a security by the SEC.
Disclaimer: This is not investment advice. Please do your own research before investing into crypto-assets and always seek professional advice before making any investment.
Despite Mr Gensler’s recent comments, Cyber Capital maintains its stance that a sensible demarcation line between commodities and securities would be between those blockchains which are permissioned and those which are not. In the above graph, the demarcation line would be between the orange (Ethereum Classic, Ethereum, Cardano, EOS and NEM) and red (IOTA, Stellar, XRP, HashGraph and NEO) categories.
Mr Gensler speculated that also the orange category may fulfill the definition of securities in the US, the Howey test.
A person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates
But the fact that the Ethereum Foundation and the founders of other coins in the orange category have in the past raised capital does not mean they can be practically held responsible for that blockchain today. Since the launch of these blockchains, these dark green (Bitcoin Core, Bitcoin Cash and Monero), green (LiteCoin, Decred, Dash and Nano) and orange blockchains have been properly decentralised (EOS is launching this June). Thereby they are out of control of the initial benefactors. Therefore the SEC in our view is not practically able to use these benefactors as their de facto counterparties for these blockchains and force them to comply with SEC regulations.
What if a blockchain is “wrongly” classified as a security? Lets for example assume the SEC decides that Ethereum or other orange blockchains are a security. Then such a blockchain has no party who can represent them in front of the SEC to get properly registered as a security and comply with ongoing onerous disclosure requirements. Consequently they can not be traded anymore on regulated US exchanges. Investors in these blockchains would then have to start a case against the SEC to get these blockchains classified as a commodity. The uncertainty during such a process can last up to 5 years and will hurt the ecosystem surrounding that blockchain. As this would cause a significant competitive disadvantage for the US blockchain innovation industry versus the rest of the world, we feel this is another reason why the US will ultimately have to draw the demarcation line more practically between red, permissioned, and orange, permissionless blockchains.
According to the WSJ, a working group of senior SEC and CFTC officials is scheduled to discuss the possibility of regulating cryptocurrencies on May 7.
Cyber Capital research: Alex Fauvel, Fundamental Analyst, and Jan Smit, Portfolio Manager. Cyber Capital is a crypto-asset investment fund based in The Netherlands. The fund portfolio is actively managed and contains up to a 100 different crypto-assets.