SEC Labels 37 Cryptocurrencies as Securities: Implications for Trading

2023-06-01, 03:43

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## [TL; DR]
The SEC has classified 37 cryptocurrencies, including <a href="/price/decentraland-mana" target="_blank" class="blog_inner_link">Decentraland</a> (MANA), DASH (DASH) <a href="/price/algorand-algo" target="_blank" class="blog_inner_link">Algorand</a> (ALGO), <a href="/price/terra-luna" target="_blank" class="blog_inner_link">Terra</a> USD (UST) and Tron (TRX), as securities.

All crypto exchanges operating in the United States should register the 37 crypto securities with the SEC before allowing the public to trade.

Declaring some cryptocurrencies as securities will stifle the growth of the blockchain sector and crypto industry. 
Crypto traders need to know the correct type of cryptocurrencies before investing in them to avoid the associated security risks.

## Introduction
Many governments around the world have not yet finalized on crypto legislation. Nonetheless, some countries use the existing financial regulations to monitor crypto activities. One of the greatest debates raging around the world is on how to classify cryptocurrencies: should they be categorized as commodities like gold or as securities like stocks. This article discusses the United States’ recent classification of 37 cryptocurrencies as securities and its implications.

## SEC’s stance on cryptocurrencies 
In its quest to regulate crypto assets, the US Securities and Exchange Commission (SEC) has classified 37 cryptocurrencies as securities, something that has many implications to investors, crypto exchanges and the broader blockchain sector.

The SEC categorized these cryptocurrencies as securities based on the standards of the Securities Act of 1933 and the related court decisions on crypto assets. The prominent case of SEC v. W. J. Howey Co established the Howey Test criteria which determine if an investment instrument is a security or not.

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SEC - United States - Fibogroup

The Howey Test criteria assess if an investment in an enterprise is carried out with the primary aim of generating a profit from the effort of a third party or the promoter. In other words, if  investors realize profit from the sale of an investment asset or through collecting dividends or interest accrued that investment instrument is a security.

Read also: [The SEC took action against Kim Kardashian for endorsing Ethereum max EMAX](https://www.gate.io/blog_detail/1689/the-sec-took-action-against-kim-kardashian-for-endorsing-ethereum-max-emax "The SEC took action against Kim Kardashian for endorsing Ethereum max EMAX")

In simple terms, a security is an investment instrument that represents a claim on the issuer. Put differently, a security gives the investor the right to receive future cashflow from a third party. Examples of securities are stocks, bonds and derivatives which are [regulated by the SEC in the United States](https://www.gate.io/blog_detail/384/ "regulated by the SEC in the United States").

Therefore the SEC has identified several cryptocurrencies that meet the Howey Test  criteria.

## The following are crypto securities:
<a href="/price/xrp-xrp" target="_blank" class="blog_inner_link">XRP</a> (XRP), Telegram Gram Token (TON), LBRY Credits (LBC), Decentraland (MANA), DASH (DASH), Power Ledger (POWR), OmiseGo (OMG), Algorand (ALGO), Naga (NGC), TokenCard (TKN), IHT Real Estate (IHT), Kik (KIN), Salt Lending (SALT), Beaxy Token (BXY), DragonChain (DRGN), Tron (TRX), <a href="/price/bittorrent-btt" target="_blank" class="blog_inner_link">BitTorrent</a> (BTT), Terra USD (UST), Luna (LUNA), Mirror Protocol mAssets (Multiple Symbols), Mirror Protocol (MIR), Mango (MNGO), Ducat (DUCAT), Locke (LOCKE), EthereumMax (EMAX), Hydro (HYDRO), BitConnect (BCC), Meta 1 Coin (META1), Rally (RLY), DerivaDAO (DDX), XYO Network (XYO), Rari (RGT), Liechtenstein Cryptoasset Exchange (LCX), DFX Finance (DFX), Kromatica (KROM), FlexaCoin (AMP) and <a href="/price/filecoin-fil" target="_blank" class="blog_inner_link">Filecoin</a> (FIL).

## Legal ramifications of crypto trading security
In light of the classification of the above cryptocurrencies as securities it is important to understand the legal implications of that. For instance, it becomes illegal for U.S based exchanges to sell unregistered crypto securities. Therefore, exchanges should register all the cryptocurrencies classified as securities with the SEC before offering them for public sale.

According to the established crypto regulation in the United States, selling unregistered crypto securities attracts stiff penalties which may include profit disgorgement or fines. Therefore exchanges that list these cryptocurrencies will face heightened scrutiny from the authorities. What we know is that most crypto exchanges in the United States sell several of these crypto securities.

Read also: [G7 sets Out to Strengthen Crypto Regulations](https://www.gate.io/th/blog_detail/2564/g7-sets-out-to-strengthen-crypto-regulations "G7 sets Out to Strengthen Crypto Regulations")

Even after registering these cryptocurrencies the exchanges need to do much more. There are other SEC crypto regulations and disclosure requirements which they should adhere to. As an instance, they should honor investor protection, trading and reporting rules.

This classification of some cryptocurrencies as securities means that their issuers will need to abide by the U.S crypto regulation when crowdfunding. For Example, they need to register their crypto assets before using Initial coin offerings (ICOs) to raise funds for their projects. Since many ICOs lack transparency and accountability the regulatory authority like SEC may enforce certain action against them.

Read also: [Do Kwon Reaches 5-star Wanted level as SEC Brings More Fraud Charges](https://www.gate.io/blog_detail/2238/do-kwon-reaches-5-star-wanted-level-as-sec-brings-more-fraud-charges "Do Kwon Reaches 5-star Wanted level as SEC Brings More Fraud Charges")

The classification of the identified cryptocurrencies as securities has direct or indirect legal implications on the investors as well. Before crypto trading security an investor should ensure that the digital asset is registered according to the law. This is because there is a danger that the asset he/she invests in may be delisted from several exchanges in the future which reduces its liquidity and market exposure.

Nonetheless, this could be good news for some risk averse crypto investors. This is because the Federal laws protect them against malpractices which some crypto exchanges and projects carry out. Again, the investors gain confidence in cryptocurrencies which enables them to invest more in them.

## Effects of classifying cryptocurrencies as securities on the blockchain
There is no question that classifying some cryptocurrencies as securities will hinder the development and expansion of the blockchain sector and the crypto industry. For Example, it will be more difficult than before for some crypto projects to raise funds using ICOs.

Read also: [Historic: Florida Enacts Groundbreaking legislation Against CBDCs](https://www.gate.io/blog_detail/2664/historic-florida-enacts-groundbreaking-legislation-cbdcs "Historic: Florida Enacts Groundbreaking legislation Against CBDCs")

Also, it will be difficult for some U.S based crypto projects and startups to invest in some crypto projects. As an instance, some blockchain based projects located outside the United States  may block IP addresses of U.S individuals or startups.

In addition, legal costs which some crypto projects face for infringing U.S crypto regulations will negatively affect their cash <a href="/price/flow-flow" target="_blank" class="blog_inner_link">Flow</a> and financial stability.This may lead to closures of some blockchain based projects.

Further to this, the market for crypto securities will shrink. Already, we know that the United States is the country with the highest number of crypto investors. What this means is that these individuals will likely reduce their investments in assets that are declared illegal by their country.

## Towards regulatory transparency
Any regulatory bodies like the SEC should create transparent regulation that protect the consumers and foster innovation in the sector. For Example, they should give clear guidelines for registration of cryptocurrencies as well as reporting and disclosure requirements.

All involved parties like coin issuers and other DeFi projects should know the rules that apply in the crypto space which enable them to adopt best operating policies and practices. For Example, if the authorities regulate the exchanges financial institutions like banks can offer their services to support the sector.

Lastly, the regulatory authorities should be specific on tax requirements for crypto assets. For Example, they should state the type of taxes exchanges and other crypto projects need to pay. Countries that treat cryptocurrencies as commodities may require that crypto holders pay property gains tax.

## Conclusion
The US Securities and Exchange Commission (SEC) has classified 37 cryptocurrencies as securities which may impact on the size of their market as well as their liquidity. Decentraland (MANA), DASH (DASH) Algorand (ALGO), Terra USD (UST) and Tron (TRX) are Examples of cryptocurrencies which the SEC has declared as securities.

<div class="blog-details-info">
<div>Author:** Mashell C.**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
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