What's with the SEC's Crackdown?

Exploring the Meaning of Securities in the Crypto Context

Introduction

In view of the recent news of the regulatory crackdown on centralised crypto exchanges like Binance or Coinbase, it is important to revive some dialogue surrounding the meaning of securities and what they entail in the context of crypto.

The Securities and Exchange Commission (SEC) is looking to further tighten its grip on the crypto sector. Amidst the far-reaching speculations on prominent online platforms, it remains important to remember that regulation serves first and foremost to protect retail investors and ensuring that market players conduct themselves fairly and transparently.

Moreover, it is worth noting that several blockchain organisations have expressed their intent to collaborate with authorities in order to ensure a safe user environment. For instance, the Solana Foundation has released several statements expressing their commitment in pursuing a constructive dialogue with regulatory bodies and ensure that users are equipped with necessary protection.

While many crypto tokens have meanwhile been classified as “securities”, it is crucial to examine their standing from a legal point of view.

What is a security?

A security is essentially any investment asset that contains a certain financial value (see Howey Test). In the U.S. Securities Act of 1933, a security is defined as any type of investment instrument or contract that represents ownership in a company, debt obligation, or the right to participate in profit-sharing or capital appreciation.

Hence, securities can range from typical forms of share ownership in a company to publicly tradable assets such as stocks or government bonds. The underlying conflict with cryptocurrencies arises when it comes to registration of securities in the form of a prospectus. A prospectus is a comprehensive document that discloses pertinent company information, including the risks associated with investing in a particular asset.

However, cryptocurrencies are typically not offered via a public prospectus. Most disclosure documents that accompany the purchase of securities are whitepapers, user agreements, risk disclosures and terms of service. Therefore, cryptocurrencies constitute a big grey area in regulation as it is difficult to determine whether they would qualify for an exemption.

Registration & Exemptions

The Securities Act generally states that any type of security offered for sale must be registered with the SEC, unless they qualify for an exemption. Under US capital law, which serves as a benchmark for International Capital Markets, the conditions for such an exemption are found under a chapter named Regulation D.

In order to participate in an offering listed under Regulation D, one must be an accredited investor or fulfil certain sophistication standards. An accredited investor can range from an institutional player like an asset manager, investment firm or insurance company to any individual person with a high-net worth.

Speaking in those terms, if a person or an entity was to acquire a crypto token as an unregistered security, they would either have to be accredited investors or display certain sophistication standards. Such sophistication standards can include years of experience at a industry-relevant firm, possession of professional certifications or knowledge and understanding of complex technicalities of blockchain and tokenisation of assets.

Such criteria are designed to ensure that investors have the necessary expertise and resources to evaluate and navigate the potential risks associated with sophisticated investment opportunities. Despite the guidelines, there is still a lack of clarity surrounding the definition of an accredited market player and the ambiguity of legal requirements for participating in unregistered securities, which both constitute a large source of conflict in the present case.

Are cryptocurrencies exempt?

The classification of cryptocurrencies as securities and the requirement for registration with regulatory bodies, including the issuance of a prospectus, is a pivotal question addressed by the SEC. The focus lies not on whether these crypto tokens are securities, but rather on the fact that they have been offered to the public as unregistered securities.

For a considerable period, the status of token offerings as securities has remained a grey area, lacking clear guidelines. However, recent actions by the SEC against crypto exchanges have resulted in the classification of numerous cryptocurrencies as securities.

This development highlights the increasing scrutiny and enforcement efforts surrounding the regulatory compliance of cryptocurrencies.

What can users do?

Given the evolving nature of the SEC crackdown and forthcoming details, it is crucial to stay informed about the latest developments.

Individuals should take the initiative to familiarise themselves with their respective rules, user agreements or whitepapers to ensure they have a more comprehensive understanding of framework that is governing their holdings.

Moreover, by proactively educating themselves about laws and regulations, users can also contribute to a responsible and compliant crypto ecosystem.

Enhancing Transparency Through Blockchain Explorers

SolanaFM, a prominent block explorer, plays a crucial role in promoting transparency within the Solana ecosystem. Its primary function is to enable users to effortlessly track funds and obtain comprehensive insights into their accounts and assets.

Additionally, SolanaFM actively identifies and tags accounts associated with malicious activities, striving to establish efficient mechanisms for alerting users in real-time about any suspicious actions. By providing these essential features and actively monitoring the network, SolanaFM contributes to creating a secure and trustworthy environment for its users.

Users can refer to solana.fm to explore the Solana network. Our recent publication on blockchain explorers (see Solana: Explorers: Frontrunners of transparency in a decentralised ecosystem).

Disclaimer: This article is intended for informational purposes only. The opinions and viewpoints expressed herein do not constitute an offer or solicitation to acquire tokens or engage in any investment activities. Readers should conduct their own research and exercise caution before making any financial decisions. The information provided in this article also does not constitute financial or legal advice.