We've heard the question over and over 'What is a Security?' So today we look at the impact for US investors if most crypto projects are considered a security.
Let’s take a look.
We recently looked at the Howey Test in great detail. In this article, we looked at how this test and a 1946 law help the US decide what is a security. We are not going to relist all those reasons why the US uses this test and why an update is necessary for modern enterprises like digital assets.
And right now, the list of those that definitely are not securities is very small. That is according to Gary Gensler’s current version of the SEC. The only ones in the clear so far are:
At first, it seems like this would be a good thing in terms regulatory clarity. Projects would know if they are a security or not. If they are a commodity like Bitcoin, then they have certain requirements and certain agencies to report to. And if they are a security, then they have to report to the SEC.
But sadly, it would not give us the clarity that the industry is looking for. Just look at Coinbase. For months and months, they’ve said “please tell us how we can register”. And they’ve gotten no response.
But what would happen if most cryptos were deemed securities?
Americans are still a big chunk of crypto buyers. If crypto was a security, then they would all have to register in the US and only be sold in the US by registered broker-dealers. Some like Coinbase might go for that designation and others like Fidelity that have it already might expand their crypto offerings to the other “safe” cryptos.
But ALL DEX transactions would be illegal just as all transactions not through a registered broker-dealer for securities are illegal. DEX transaction volume would fall off a cliff.
The compliance and disclosure requirements are so detailed and so expensive that this would create a ban on those cryptos for most US users. Savvy crypto investors could get around it by buying BTC, ETH, or DOT and going to a DEX to swap it for the coin they want but it will be a real pain for US users. More transactions and more money for basically no reason at all.
Small retail investors would get screwed big time by this ruling of crypto as a security. Right now, any project with a public sale not involving KYC OR a project with a fair launch means that ANYONE can choose to invest.
That will end for small US investors if crypto is a security. If that happens, then only accredited investors can get into a project early, like they can with early private seed and VC investments that already exclude small investors. It would just be one more way the little guy gets screwed. They will have to wait for the public listing of the tokens to then buy through the registered broker of their choice.
Lastly, potential liability when something goes wrong will skyrocket for projects. There’s a well-established system and case law for taking a company to court when something happens with its stock in the US. The same would be true of foundations and dev teams for projects considered a security. They open themselves up to a huge amount of potential liability and the legal and compliance costs not just to stay legal but also to defend themselves would be enormous.
Most just won’t do it and will ban US users.
So what really would happen if most crypto projects are now securities? It would act like a ban for casual users. For power users, they will find a way but it will be more transactions, hoops to jump through, and fees to pay. It won’t protect small investors. In fact, it will hurt them.
But one thing is for sure. It won’t stop crypto. Crypto is here to stay and is more than any one nation and what they say and do about it—even a powerful nation like the US.
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