Cryptocurrency regulation is still under debate. The recent crypto market crash has caused thousands of people to lose their life savings. This crash calls into question whether stronger cryptocurrency regulation should be implemented. One problem with cryptocurrency is how to classify it: is it a security, an investment contract, a commodity, property or currency?
A commodity or a security?
There is a lack of consensus among government agencies and courts about cryptocurrency regulation. Obviously, crypto titans and developers seek to define cryptocurrency to minimize regulatory oversight. They argue cryptocurrency is a commodity or actual currency, and should be regulated by the Commodity Futures Trading Commission (“CTFC”). Conversely, the United States Securities & Exchange Commission (“SEC”) holds that virtual currencies are securities subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.
United States courts have begun to weigh in on this classification quandary. In February 2022, the Southern District of New York recently held that “several agencies may have concurrent regulatory authority in the cryptocurrency space.” Even though cryptocurrency may be an “investment contract” under the Securities Act of 1933, that does not mean that “cryptocurrency is not a ‘commodity’ within the meaning of the” Commodity Exchange Act. Instead, cryptocurrency is subject to both laws. The fact that cryptocurrency “function[s] differently” than other assets makes it more subject to regulation, not less. Cryptocurrency promoters should beware of overlapping commodity and securities regulations.
In 2021, Congress introduced the Digital Asset Market Structure and Investor Protection Act. This bill provides for the regulation of digital assets and digital asset securities. The bill includes amendments to current federal securities laws and the Commodity Exchange Act. The bill defines and distinguishes a digital asset versus a digital security under the respective regulatory bodies of law.
Under such legislation, it appears a cryptocurrency’s characteristics at a given time best determine whether it will be regulated by the SEC or the CTFC. For instance, an Initial Coin Offering is generally considered a security. Like an IPO, an ICO’s purpose is to raise capital by selling new tokens or coins to investors.
Current Regulation
The Securities Act of 1933 and the Securities Exchange Act of 1934 regulate the issuance and sales of investment products that qualify as securities under each Act. Congress’s intent “was to regulate investments, in whatever form they are made and by whatever name they are called.” This was to ensure that securities laws would “turn on the economic realities underlying a transaction, and not on the name appended thereto.” Securities laws define what is a security. That definition is broad in order to catch and punish all kinds of fraudulent schemes. Lately, due to the recent devastating cryptocurrency market crash, some regulators have argued that cryptocurrencies are ponzi schemes with no real value. Christine Lagarde, the president of the European Central Bank, warned that cryptocurrencies are worthless.
Photo by Pierre Borthiry on Unsplash
Lately, many people have lost their life savings by gambling on cryptocurrency markets. In the end, cryptocurrencies are not backed by any assets. Their value is based on assurances from the developers that the algorithms and data create stability and value. However, in reality, these types of investments are highly speculative and extremely risky. Like a currency, cryptocurrency only has value if people will accept it. This means that if a cryptocurrency fails to catch on, even a “successful” offering leaves investors holding a wallet of useless virtual money. Investors should understand they may likely lose their entire investment.
This May 2022 crypto market crash will likely result in greater cryptocurrency regulation. Regulators will take action and expand their regulatory jurisdiction. There may be a rise in regulatory oversight into the cryptocurrency markets. Given the thousands of people who recently lost their life savings, this type of regulatory oversight may be a good thing. At the very least, it should begin to promote transparency regarding the actual value of a coin or token.
How We Can Help
So what to do? Are you thinking about developing an initial coin offering? Call us BEFORE you do anything to respond. An angry group of investors or a regulatory investigation is a terrible thing that can happen to you. In fact, few people realize raising money without strict compliance with federal and state securities laws is a felony. We encourage everyone to seek competent legal advice BEFORE taking any cash or raising funds, even for ICOs. Alternatively, if you have been involved in a cryptocurrency scheme or are defending yourself in an investigation, we may be able to help. Please give us a call at 713-961-7770 or contact us by email to discuss your issues.