Regulation of Cryptocurrencies: Are They Considered Securities or Commodities? Analyzing the Regulatory Overlap and its Effects
Determining whether cryptocurrencies should be classified as securities or commodities has been an issue of contention, as the distinction between the two categories, particularly in the United States is not always straightforward.
Depending on the regulator consulted in the United States, which has been the centre of crypto innovation, a crypto asset might be deemed a security or a commodity.
Regulatory Differences Between SEC and CFTC
Two primary regulatory bodies, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), wield authority over crypto assets in the US. However, the boundaries of their jurisdiction are blurred, which has been a source of confusion among market participants.
The SEC oversees securities and applies the Howey Test to determine whether certain cryptocurrencies qualify as securities. According to this legal standard, which originated from a 1946 Supreme Court case, an asset can be classified as a security if it involves an investment of money with an expectation of profit primarily from the efforts of others.
On the other hand, the CFTC categorizes cryptocurrencies such as Bitcoin and Ethereum as commodities, asserting jurisdiction over them through the Commodity Exchange Act. The differentiation between securities and commodities is critical as each classification entails distinct regulatory and legal obligations.
Securities are financial instruments that represent a claim on the issuer, such as stocks, bonds, and derivatives. Commodities are physical goods that are traded on exchanges in wholesale quantities. These can include agricultural products like corn and wheat, as well as precious metals like gold and silver.
This lack of clarity has led to a series of legal disputes with both regulators sometimes asserting jurisdiction over the same crypto assets. Market participants are unsure about the legal standing of their investments while businesses operate amidst a fluctuating regulatory landscape.
Most recently, Ethereum infra company, ConsenSys, filed a lawsuit against the SEC and its Commissioners arguing that the SEC is unlawfully claiming that Ethereum’s $ETH token is a security.
“The U.S. Securities and Exchange Commission seeks to regulate ETH as a security, even though ETH bears none of the attributes of a security – and even though the SEC has previously told the world that ETH is not a security, and not within the SEC’s statutory jurisdiction,” according to the lawsuit filed in a Texas court on 25th April 25, 2024.
🇺🇸REGULATION | United States Notifies ConsenSys of Legal Action Against MetaMask as it Labels ETH a Security
The SEC reportedly believes the MetaMask Swaps and Staking services violate federal security laws because ConsenSys is not a broker-dealer. A broker-dealer is a… pic.twitter.com/HemC76sh1T
— BitKE (@BitcoinKE) April 30, 2024
SEC Chairman, Gary Gensler, previously said that all crypto tokens, besides bitcoin, are securities.
All said, the matter might be put to rest by recent legislation. On May 22, 2024, the United States House of Representatives passed a landmark bill which establishes a federal framework for regulating digital assets, defining the jurisdiction between CFTC and the SEC.
🇺🇸REGULATION | U.S. Legislators Pass FIT21 Establishing a Federal Crypto Regulatory Framework
Consequently, crypto companies and digital asset issuers would have a framework for determining whether and how their assets are securities under the terms defined by the bill, which… pic.twitter.com/wlki0AhXLG
See also
— BitKE (@BitcoinKE) May 23, 2024
The bill, which still needs to pass in the Senate before approval by the President, also allows issuers to self-certify assets as digital commodities.
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