What are securities and why are cryptocurrencies called so?


Loss SecurityAlso called “titulo de valor” in Spanish Negotiable financial instruments that can be exchanged for other instruments of the same type. That is, they are fungible like money. They have a monetary value, which is created based on the supply and demand of users for this financial product. For example, shares of a company, bonds issued by a corporation or government agency, investment funds, and even derivatives are considered securities.

in general terms, Security is about A category that includes all assets traded on stock exchanges, brokerage firms and financial markets. Similarly, those instruments are considered to be called investment contracts which are not listed on the stock market, but whose basic feature is the expectation of profit through the efforts of a third party.

For example, a token has been distributed initial coin offering (ICO) may fall into this category According to the regulators, since the investors will acquire the assets with a view to increase the value of the company in future.

In this sense, securities appear as a classification that brings together a large number and diversity of marketable products. However, depending on the country or jurisdiction, some financial instruments that would be classified under this name have to comply with specific regulations, while others will not.

In recent years, the term has become common to hear in the cryptocurrency market, as a long and controversial discussion has erupted about it. if some cryptocurrency or token should be classified as financial securities and thus regulated.

But, the million dollar question is: are these cryptocurrencies really securities? Or is the regulatory body creating misconceptions about these assets? Let’s find out a little more what are the distinctive features of the security title.

1 What are the criteria for this that something is considered a security?

To understand what security is in the United States, we need to take into account an element called the Howe test or test. It is used to determine whether a financial asset is a security or not, so it must be registered and subject to the Securities Act (1993) and the Exchange Act (1994).

The Howe test was based on the Howe Company case (1942), which sold citrus trees to customers in Florida who later leased the land. Buyers did not need to care for the land or know anything about agriculture, as Howe’s employees would tend the land.

through an agreement, Both the parties (investor and company) will share the profits, This operation was classified as an “investment contract” for the United States Securities and Exchange Commission (SEC), so it had to be registered with the authorities.

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The case eventually reached the Supreme Court of the United States, where it determined that the leases were securities. Taking this case as a model, the US court proposed a definition for a security, which stated that if “money is invested in a common enterprise with a reasonable expectation of profit which may be derived from the efforts of others”. Will be”, then we are facing security.

In turn, the Howey test lays out four general criteria for determining whether an asset can be considered a security. These:

What Are Securities And Why Are Cryptocurrencies Called So?
Gold, cash and bitcoin are not considered securities.

Another distinguishing detail of the security is that, unlike other assets, they are themselves a property right. I mean, In order to market a security, an investor must own it., This makes each trader the custodian of their financial product, known in the bitcoin world as a holder.

For those who are still finding it confusing to understand what a security is through Howe test, they can also be guided by all those assets no son no security To understand the selection criteria of regulators. For example:

What Are Securities And Why Are Cryptocurrencies Called So?
Any investment vehicle that protects assets or generates direct income cannot be considered securities.

Does cryptocurrency meet the criteria for being a security?

This question generates much debate. On the one hand, regulators such as the SEC affirm that some cryptocurrencies and tokens behave like a security and therefore must be regulated within their jurisdiction.

However, developers and managers of projects that are designated as securities (such as Solana, Polygon and Ripple) say that their crypto assets are actually currencies or raw materials, and therefore should not be equated with corporate action.

To understand this controversy more deeply, we have to take into account several nuances. The first thing to recognize is that, although we usually refer to any crypto asset as a “cryptocurrency”, Everything that is traded in this market is “not”Posture,

While we have some cases like bitcoin, or ether or zcash, which are created and function as digital currencies. Other assets, such as tokens, have many use cases and may have characteristics similar to what we are discussing as a security.

SEC and bitcoiners agree

The United States Securities and Exchange Commission (SEC), as well as bitcoin enthusiasts, agree that this cryptocurrency is not a security. The entity has even clarified that the Ethereum cryptocurrency, Ether, will also not fall into this category.

To further understand the difference between cryptocurrencies and tokens, we have this article from Cryptopedia where we dive deep into both the markets. But, in general, what you need to know is that Tokens can represent shares of a company financing a project and even a marketable drawing on the web.

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In this sense, let’s evaluate the common characteristics of a cryptocurrency, a token and a security to see if they are similar to each other.

What Are Securities And Why Are Cryptocurrencies Called So?
Tokens are the class of crypto assets that most closely resemble securities.

In addition to the features mentioned, it is also important to pay attention to Many cryptocurrencies and tokens are used as investment and speculative vehicles, Notably, there is no shortage of investors who buy a project’s token while waiting for the company’s value and funding to increase.

In this sense, these tokens would fall within the definition of a managed security by the SEC, where it proposed that a financial security be any financial instrument acquired for the purpose of generating profits at the expense of a third party.

Initial coin offering (ICO) is a cause of the problem

Well-known ICOs that were used to raise funding for cryptocurrency projects may be behind the regulatory buzz. According to the SEC, if a company has distributed tokens or cryptocurrencies to users in exchange for some other asset in order to finance the development of its company, then said tokens can be considered a security and they are speculating on the value of the currency .

What are the implications of cryptocurrencies being a security?

Experts point out that the first change that will cause some cryptocurrencies to be classified as securities is that there will be new rules to participate in.

All stock securities are supervised and regulated exclusively by the financial institutions of each country. To avoid market manipulation Protect investors from fraudulent practices and have all relevant information before investing.

If cryptocurrencies such as XRP, MATIX or ADA are accepted as security they must comply with the rules that govern the country’s stock markets in the jurisdiction. In the special case of the United States, which is supporting the measure, these assets will now be monitored by the SEC and approved if they deem it necessary.

Exodus of cryptocurrencies and tokens

Currently, exchanges have removed these assets from their services due to the possibility of some cryptocurrencies being classified as securities. Limiting the possibility of doing business with them in the United States as well as other countries in the region.

It is estimated that in the long term, Higher expenses may arise for exchanges and trading platforms, All of these coins would need to be registered with the Securities and Exchange Commission in order to allow companies to trade in such assets, which means administrative paperwork will increase operating costs. Similarly, they will face more penalties and legal proceedings as compared to handling other types of assets.

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In relation to the price of assets, although many of them may be tokens and cryptocurrencies used in different parts of the world, a measure of this style can have an effect on their price. With the first statements from the SEC in this regard, strong price movements have already arisen.

What is the role of the SEC in regulating cryptocurrencies?

While it is still too early to know what role the United States Securities and Exchange Commission will play in the cryptocurrency ecosystem, we do have some clues as to how it may behave in the longer term. However, the first thing to note is He sec role The focus will be on the US cryptocurrency market

This regulator only has legal power in the North American region, so the way cryptocurrencies are regulated and classified will depend on each country. However, this does not mean that the decisions taken by the US government will not have any impact on the cryptocurrency market.

United States: an influential person?

After all, it is the most important economy in the world and one of the countries that concentrates the largest number of companies in this sector in the world. Because of this, we may see other countries taking a similar approach to US regulators in overseeing their domestic markets for tokens and cryptocurrencies.

In this sense we can say that The main role the SEC plays in regulating cryptocurrencies today is to supervise companies who provide services to this market. For example, exchanges, companies that issue stablecoins, and lending platforms. Any firm that has a presence in the United States and provides cryptographic asset services to citizens of this country must maintain a close relationship with the regulator.

If it is later confirmed that some cryptocurrencies, such as Cardano, Polygon or Solana Network, definitely have stock value; Then another layer of complexity can be added. The SEC, when this classification is confirmed, would become the body in charge of regulating and supervising any operations carried out by these networks in the US territory.


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