Which cryptocurrencies are securities and why

Andy

February 27, 2024

‍What is a cryptocurrency

A form of money that exists purely as digital information, secured by complex codes instead of locked vaults. That's cryptocurrency in a nutshell. It lives on decentralized networks, independent of banks or governments, allowing for peer-to-peer transactions without intermediaries. Think of it as a global payment system accessible to anyone with an internet connection, where transactions are recorded on a shared public ledger called a blockchain, ensuring transparency and security. While its value fluctuates like traditional currencies, its unique characteristics like limited supply and anonymity have sparked both excitement and controversy, making it a complex and evolving phenomenon in the financial landscape.

What is a security:

A security, in the financial world, is like a tiny piece of ownership or a promise to pay. Imagine it as a claim check for a valuable asset, be it a company's success (stocks), a loan you've given (bonds), or even the right to buy or sell something later (options).

These tiny claims can be traded and change hands, just like physical objects, but instead of holding a certificate, you own a digital record on a platform. These securities fuel the engine of finance, allowing companies to raise capital, investors to access various markets, and even governments to manage their debt. However, the value of these claims can fluctuate depending on various factors, making them a double-edged sword: offering potential for gain but also carrying the risk of loss.

Pros and cons of being classified as a security:

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Pros

Cons

Increased investor protection: Securities fall under specific regulations aimed at protecting investors from fraud and manipulation. This includes disclosure requirements, transparency standards, and potential legal recourse in case of wrongdoing.

Regulatory burden & Potential for litigation: Compliance with security regulations can be complex, time-consuming, and expensive, potentially hindering smaller issuers or projects. Security status exposes issuers to potential lawsuits from investors claiming misrepresentation or other legal violations.

Enhanced credibility and trust: Security status can signal legitimacy and attract a wider range of investors, boosting confidence and potentially increasing the asset's value.

Increased scrutiny and disclosure: Issuers become subject to ongoing reporting and disclosure requirements, potentially revealing sensitive information not ideal for all companies.

Access to new funding sources & Potential for liquidity and tradability: Issuing securities opens doors to broader capital markets, allowing companies or projects to raise more funds from diverse investors.

Depending on the security type, classification can unlock secondary markets where investors can easily buy and sell, promoting liquidity and price discovery.

Market volatility and risk: Securities are often traded on open markets, where prices can fluctuate significantly, exposing investors to potential losses.

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Which cryptos are securities & why:

The Howey Test: The most prominent framework used by regulators like the US Securities and Exchange Commission (SEC) is the Howey Test, established in a 1946 Supreme Court case. This test identifies four criteria:

Investment of money: Investors contribute funds or assets.
Expectation of profits: Investors have a reasonable expectation of profits primarily from the efforts of others managing the project.
Common enterprise: Investors share a common financial interest in the project's success.
Securities markets: The investment relies on the efforts of others to generate profits and is traded on secondary markets.

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According to this framework, these cryptos and more besides could be considered securities:

Ripple (XRP)

Telegram’s Gram (TON)

OmiseGo (OMG)

DASH (DASH)

Algorand (ALGO)

Amp (AMP)

Rally (RLY)

Rari Governance Token (RGT)

Tron (TRX)

BitTorrent (BTT)