The Securities and Exchange Commission provided a nearer-term lifeline for cryptocurrencies, which suffered sharp losses over the past several weeks. Most notably, the SEC declared that the popular duo bitcoin and ethereum are not securities. Instead, they’re digitalized commodities, similar to gold bullion but for a new generation.
I can’t stress how important the SEC decision is for the burgeoning blockchain economy. Aside from the usual concerns about exchange hacks and extreme market volatility, crypto investors feared government regulation. In recent months, bitcoin, ethereum and other virtual currencies were hit hard when agencies merely threatened regulation.
Actually going through with it would have possibly dealt a crippling blow. Cryptocurrency-trading platform’s relative anonymity played no small part in their success. At the very least, the sector faced continued, unmitigated losses.
Therefore, the SEC’s surprisingly frank and positive clarification on ethereum and bitcoin couldn’t have come at a better time. That said, not everything about this announcement is a panacea.
How Ethereum Dodged the “Security” Tag
At the very basic level, the SEC defines cryptocurrencies between two categories: those that aren’t securities, and those that are just that. Obviously, the SEC officially decided that both ethereum and bitcoin are safe. But how did the regulatory agency come to this conclusion?
The critical difference lies in how a blockchain organization distributes its cryptocurrencies. For ethereum and bitcoin, their respective blockchain networks feature decentralization. A consensus of blockchain operators (i.e., miners) ultimately determine supply dynamics. No one entity — except in the case of a devastating hack, such as a 51% attack — controls this distribution.
However, the SEC may apply the “securities” tag on any centralized blockchain networks. The existence of a central administrator that determines supply outflows could possibly be a digitalized security. Furthermore, the SEC notes how organizations created cryptocurrencies and for what motivation.
The agency’s convoluted and ambiguous definition confuses investors. To be safe, the general rule is that if a cryptocurrency acts like a security, then it’s a security.
Fair enough. But curiously, the SEC was silent on the ripple cryptocurrency. Ripple isn’t like most other virtual currencies in that it features a centralized blockchain. Not only that, ripple’s creators don’t mince their words. They believe that working with banks and financial institutions is a positive because it gives their project credibility.
But ripple joining forces with mainstream companies implies that they’re benefiting from their cryptocurrency distributions. Plus, ripple’s investors have a reasonable expectation of a return as they’re technically buying into a company as well as a commodity.
In contrast, ethereum as an entity doesn’t benefit from higher crypto prices because its tokens supply isn’t centrally administered.
The SEC Runs a Tight Ship
On a net basis, I of course consider the bitcoin and ethereum clarification a substantive victory for the blockchain economy. Most cryptocurrencies are by their very nature decentralized. In some ways, the SEC’s decision-making process was a waste of time. Still, I’m not complaining. Their decision at least acknowledges what blockchain proponents have known all along.
More importantly, the clarification provides peace of mind for current and prospective investors. The beauty of cryptocurrencies is that they operate outside the traditional financial system. You can send tokens of real economic value anytime, anywhere. Transactions are often times significantly cheaper and quicker than their traditional counterparts.
Treating this groundbreaking innovation as a commodity instead of a security keeps this “outsider” attribute alive.
At the same time, I don’t want to go overboard with the SEC’s decision. They’re keeping their cards close to their chest. Additionally, because of their ambiguous terms and definitions, the categorizations can change at a later time.
For me to truly feel comfortable, I’ll need more clarifications and assurances. In my opinion, the biggest issue is the cryptocurrency exchange, such as Coinbase. The SEC declared that bitcoin and ethereum are not securities. However, what about platforms that specialize in the buying and selling of these non-securities?
Is it enough that a crypto-exchange, which operates very much like a stock exchange, only deals with non-securities? If I’m reading the SEC guidelines correctly, intent and expectations matter. If an exchange markets itself as an investment forum, and if customers seek investment returns, we have a securities issue. And since the regulatory agency holds the final word, we’re currently left in limbo.
Heading Toward an Uncomfortable, But Necessary Truce
Again, I view the recent bitcoin and ethereum news as a net positive. But to summarize, I don’t look at the SEC announcement as their acquiescence to the blockchain economy. Instead, I view this development as a move toward an uncomfortable, but necessary truce.
Whether we like it or not, regulation is an inevitability. If we didn’t have SEC oversight, unscrupulous companies can simply raise capital through dubious initial coin offerings, and skirt the laws involved in traditional initial public offerings. That would put organizations that do the right thing at a severe disadvantage.
The goal here is not the complete absence of regulation, but the appropriate amount. In this regard, I believe bitcoin and ethereum proponents secured a lasting triumph. The SEC acknowledged that supply distribution is material in determining a cryptocurrency’s investment status. In other words, the agency has demonstrated good faith in that it is not arbitrarily hammering financial innovations.
Moving forward, we’ll see plenty of give and take. Most definitely, significant challenges remain. But for now, bitcoin and ethereum proponents can rest easy knowing that the SEC acknowledges and respects their presence.
As of this writing, Josh Enomoto is long the cryptocurrencies mentioned in this article.