SEC chairman Jay Clayton has clarified that Bitcoin is not a security. In an interview with CNBC in June, he stated: “Cryptocurrencies are replacements for sovereign currencies… [they] replace the yen, the dollar, the euro with Bitcoin. That type of currency is not a security.”
Former CFTC chairman Gary Gensler has also stated that Bitcoin cannot be classified as a security. He pointed out that Bitcoin came into existence as mining began as an incentive in validating a distributed platform, with no initial token offering, no pre-mined coins, and no kind of common enterprise.
Bitcoin has never sought public funds to develop its technology and it does not pass the Howey Test.
Ethereum and Ripple
The position is less clear when it comes to other cryptocurrencies such as Ethereum (ETH) and Ripple (XRP).
Jay Clayton has endorsed remarks made by his colleague William Hinman that Ethereum is not a security.
However, Gensler has warned that more than 1,000 cryptocurrencies are probably operating outside of US law and will have to come into regulatory compliance. He said that although Bitcoin is not a security, Ripple “sure seems like a common enterprise”.
A council created by some of the major cryptocurrency exchanges – Crypto Ratings Council – seems to agree as it awarded XRP a four out of five in matching the criteria considered to be a security. It pointed out that Ripple sold XRP before the token had any utility and used a securities-like language when promoting XRP.
Ripple CEO Brad Garlinghouse has since hit back at critics who have been “spreading fear, uncertainty, and doubt” about XRP, stating that the company’s token “is not a security”.
Speaking at the MIT Business of Blockchain conference last year, Gensler highlighted the key distinctions that could determine whether tokens are securities. In a nutshell, if a coin offering is designed to give investors an ownership stake, the token should be treated like a security and subject to regulation.
The FCA, on the other hand, recently suggested XRP is not a security because, like Ethereum, it can be used as a means of payment (exchange token) and to run applications (utility token).
Currently, the answer to the question “is cryptocurrency a security?” seems to be “it depends” or “sometimes”.
Certain crypto tokens do appear to pass the Howey Test. However, their fundamental goal of being autonomous and distributed networks that are designed to be decentralised is at odds with the regulated nature of securities.
What the regulators eventually decide will have a huge impact on the crypto world and its investors.