Which Cryptocurrencies Are Securities?

Imagine investing in your favorite cryptocurrency, and just as the value is rising, the SEC declares it a security, potentially crushing its price. The intersection between cryptocurrencies and securities law is complex and could affect the future of the entire digital currency market. Not all cryptocurrencies are created equal—some behave more like traditional securities than others. This is crucial for both investors and companies because securities laws are strict and can carry hefty penalties if ignored.

The key point is: many cryptocurrencies operate in a gray area of regulatory scrutiny, and understanding which are classified as securities will significantly impact your investment strategy.

At the core of the securities debate lies the Howey Test, a tool established by the U.S. Supreme Court in 1946 to determine whether a transaction qualifies as an "investment contract" and, therefore, a security. The test has four components:

1. An investment of money.
2. In a common enterprise.
3. With the expectation of profit.
4. Derived from the efforts of others.

Cryptocurrencies such as Bitcoin and Ethereum are generally not considered securities. They lack the centralized structure and third-party dependency typical of securities. However, the Securities and Exchange Commission (SEC) has been more stringent with other cryptocurrencies and initial coin offerings (ICOs).

The SEC’s interest in crypto began with ICOs, where new tokens were launched to raise funds, often to be used to develop decentralized platforms. Many of these token sales promised profits from the future success of the platform, closely aligning with the Howey Test's expectations of profit from the efforts of others.

A pivotal case was Ripple Labs’ XRP. The SEC has argued that XRP is a security because Ripple was actively involved in promoting XRP, and the expectation of profit was tied to Ripple's efforts. The result of this case will have lasting implications on how other cryptos are treated.

So, which cryptos are in danger of being classified as securities?

1. Ripple’s XRP: As mentioned, Ripple is under direct scrutiny by the SEC. If XRP is deemed a security, Ripple could face major regulatory hurdles.
2. LBRY Credit (LBC): In 2021, the SEC charged LBRY, a decentralized content platform, with selling unregistered securities.
3. Kin: The SEC claimed that the cryptocurrency from Kik Interactive violated securities laws, leading to a multi-million dollar fine and a settlement.
4. EOS: The blockchain platform raised $4 billion in an ICO. However, the SEC fined its parent company Block.one for conducting an unregistered securities sale.
5. Telegram’s TON: Telegram’s token offering was also halted by the SEC, citing its sale as an unregistered securities offering.

However, it’s not just cryptocurrencies that raise concerns. Platforms that facilitate token sales and exchanges are also subject to securities laws. Coinbase, Binance, and other exchanges have faced increasing regulatory scrutiny, with some tokens listed on these platforms now being treated as securities.

Why should you care? If you hold cryptocurrencies classified as securities, exchanges that list these assets might delist them to avoid legal trouble. Additionally, the value of these tokens could plummet as the market reacts to increased regulatory risk. Furthermore, companies that issue these tokens could face heavy fines or be forced to shut down.

But here's where it gets really interesting: decentralization. Many tokens try to claim they aren't securities because they operate on decentralized platforms. The argument is that if no one entity controls the platform, there is no "common enterprise" to satisfy the Howey Test. However, the SEC has pushed back, arguing that even decentralized platforms can have parties that play a critical role, making them subject to securities regulations.

The distinction between a utility token and a security token is important. Utility tokens, like Filecoin or Chainlink, are often used to access a service on a blockchain platform and aren't necessarily tied to the efforts of a single entity. These tokens can be seen more like fuel for the platform rather than investment contracts. Security tokens, on the other hand, represent an investment in a project, often with expectations of profit, making them more likely to be regulated as securities.

Here’s the catch: The regulatory landscape is evolving, and what might not be classified as a security today could be tomorrow. As the SEC continues its crackdown, many cryptos could shift into the securities bucket, and investors need to be prepared for the consequences. The global regulatory environment also plays a role, with countries like the U.K. and Japan having their own takes on what constitutes a security in the crypto world.

The bottom line is: If you're investing in cryptocurrency, you must understand whether your assets could be reclassified as securities.

To summarize the cryptocurrencies most at risk of being labeled securities:

Cryptocurrency	Status with SEC
Ripple (XRP)	Ongoing lawsuit; the SEC views XRP as a security.
LBRY Credit (LBC)	Charged by the SEC for selling unregistered securities.
Kin	Settled with the SEC over securities violations.
EOS	Block.one fined for conducting an unregistered securities sale.
Telegram (TON)	Halted by the SEC, declared an unregistered securities offering.

In conclusion, understanding how the SEC and global regulators classify cryptocurrencies is critical for any serious investor. As regulators clamp down on cryptocurrencies that act like securities, the rules of the game are changing, and those who stay informed will be the ones who profit.