In a stunning yet mundane announcement, the Securities and Exchange Commission declared – hopefully once and for all – that ether and bitcoin cryptocurrencies are not securities. They will be treated as assets or commodities, similar to gold bullion or barrels of oil.
The importance of this announcement cannot be overemphasized. For nearly a decade, bitcoin, and later ether and other altcoins have traded hands under a gray zone. On the surface, investors traded them in a similar format like securities. But on the flipside, you can’t make the argument that cryptocurrencies are the same as traditional securities.
For one thing, publicly-issued equities are only open for trading (from a retail investor’s perspective) at predetermined schedules. Almost always, this means Wall Street hours – 9:30am EST to 4:00pm EST. This limitation contrasts sharply with cryptocurrencies based on the Bitcoin and Ethereum blockchains, which are open for trading 24/7, 365 days a year.
Another differentiating factor is that ether and bitcoin are transacted outside the mainstream financial network. As a result, it’s extraordinarily difficult for regulatory agencies to track these transactions, and to tax them accordingly. This is a huge reason why the SEC got involved in the ether and bitcoin debate in the first place.
But arguably the biggest issue is ownership. Companies issuing equity shares have a vested interest in promoting themselves to prospective investors. Insiders can also be lured or tempted into manipulation or otherwise defrauding the markets for personal gain.
While no investment class can avoid unscrupulous behavior, the practical incentive to do this in the blockchain is much more constrained. By their very nature, the Bitcoin and Ethereum blockchains are decentralized platforms. Neither ether nor bitcoin supply are impacted by a central administrator.
Indeed, the SEC distinguishes cryptocurrencies like ether into two categories: coins and tokens. According to the SEC, coins are largely digitalized assets. This is where bitcoin and ether are classified (for now). Tokens, on the other hand, are controlled through “managerial stewardship.” The SEC will regard these cryptos as securities.
The differentiation is arbitrary, to say the least. The SEC implied that a particular cryptocurrency can transition between the regulatory agency’s categories. Which is a strange concept because most cryptocurrencies (save for notable exceptions like Ripple) are decentralized assets.
And I’m sure ardent Bitcoin and Ethereum blockchain proponents are angered at the SEC’s hubris. As I stated earlier, bitcoin and ether operate outside the boundaries of investment securities. No one benefits from the “ownership” of the blockchain as the ownership operates via consensus, not via insider elitism.
Still, we should take our victories whenever they come. I’m encouraged at the SEC approval, although I’ve got my eyes wide open.