SEC deems most crypto assets are not securities in new guidance
The Securities and Exchange Commission made formal something Chairman Paul Adkins has repeatedly said, including during a speech at the Federal Reserve Bank of Philadelphia’s fintech conference in November: Most cryptocurrencies are not securities.
In a 68-page guidance issued with the Commodity Futures Trading Commission (CFTC), the agencies classified digital assets into five categories, which include digital commodities, digital collectibles, digital tools, stablecoins and digital securities.
According to the guidance, digital commodities, digital collectibles and digital tools are not securities. However, “as with any asset that is not a security, a non-security crypto asset can be offered and sold subject to an investment contract, which is a security."
"A non-security crypto asset becomes subject to an investment contract when an issuer offers it by inducing an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts from which a purchaser would reasonably expect to derive profits," the SEC stated.
In its newest interpretation, the SEC identifies digital securities as the one crypto asset that is explicitly a security.
Some stablecoins will be classified as securities, but covered stablecoins - which are designed and marketed for use as a means of making payments, transmitting money or storing value - are not considered securities.
Digital securities, which are more commonly known as tokenized securities, are either tokenized on behalf of the issuers of the securities or by a third party unaffiliated with the security. Either way, they will still be classified as securities by the regulators.
"A security is a security regardless of whether it is issued, or otherwise represented, offchain or onchain," the guidance said. "All devices and instruments that have the economic characteristics of a security are securities regardless of format or label."
Regulators to maintain Howey Test rules
The SEC and CFTC are not going to abandon the Howey Test, which is based on a 1946 US Supreme Court case that determined when an asset qualifies as an investment contract and therefore should be designated as a security.
The court ruled that an investment contract exists “when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Although the Howey Test has since been used for designating securities, experts within the crypto industry have argued that applying it to digital assets doesn't really work since cryptocurrencies are decentralized.
But Atkins said in his speech at the Federal Reserve Bank of Philadelphia’s fintech conference that "the Commission will consider establishing a token taxonomy that is anchored in the longstanding Howey investment contract securities analysis, recognizing that there are limiting principles to our laws and regulations."
The 68-page guidance does not yet count as a formal rule, but it is significant because it is the first time the SEC has sought to clarify which crypto assets count as securities and which ones do not. The crypto industry has been seeking this level of regulatory clarity for years.
“After more than a decade of uncertainty, this interpretation will provide market participants with a clear understanding of how the Commission treats crypto assets under federal securities laws,” Atkins said in a statement. “This is what regulatory agencies are supposed to do: draw clear lines in clear terms.”
He added that the agency "also acknowledges what the former administration refused to recognize – that most crypto assets are not themselves securities."
The SEC and CFTC announced a "historic" agreement last week in which the agencies said they would work together to regulate crypto and other industries together as partners. This interpretive guidance on cryptocurrencies is a result of that new partnership.
“For far too long, American builders, innovators, and entrepreneurs have awaited clear guidance on the status of crypto assets under the federal securities and commodity laws,” CFTC Chairman Michael S. Selig said in a statement. “With today’s interpretation, the wait is over.”