Coin Center, a non-profit research organization dedicated to advocating the benefits of blockchain technologies to governments and regulatory bodies, recently published an updated version of their framework for the securities regulation of cryptocurrencies.
Originally published in 2016, this updated report aims to be a guide on how governments can assess whether or not cryptocurrencies and tokens should in fact be considered securities, and as such, be regulated accordingly.
The report identifies three variables within the technology components of a cryptocurrency, as well as the community associated with it, as indicators in ascertaining the level of risk for investors; these three variables are: distribution, decentralization and functionality. For example, in the report, Coin Center argues that certain cryptocurrencies such as Bitcoin, are large and decentralized enough, and thus, do not easily fit the definition of a security.
In order to determine whether or not something is a security, it is traditionally put through what is known as the Howey Test, a test which was the result of a 1946 U.S. Supreme Court case, SEC v Howey Co. The test utilizes the following criteria, that if met, will likely result in the asset being considered a security:
- There is an investment of money
- There is an expectation of profit from the investment
- The investment of money is a common enterprise
- Any profits come from the efforts of a promoter or third party.
The reason why it is important for a cryptocurrency not to be considered a security, is that it's important not to violate the U.S. Securities Act of 1933 and Securities Exchange Act of 1934. A violation would leave the project managers at legal risk from prosecution by the administering regulatory body, which in this case is the U.S. Securities and Exchange Commission (SEC).
This report holds large ramifications for the cryptocurrency industry because it provides a means for prospective ICO operators, and regulatory bodies, to fully determine exactly what digital assets should be considered as securities.
Certain projects may look to take preemptive action and follow the guidelines set out by Coin Center, in order to sufficiently differentiate themselves enough so that they may not be considered a security.
Investors can use this information and judge for themselves if a project they are currently invested is a security, because if the SEC were to deem it as being the case, it may negatively affect their portfolio.
The full report can be found on the Coin Center website.
Picture from Max Pixel.
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My name is Bisola Asolo and I am a cryptocurrency enthusiast! I love reading, listening and writing about anything and everything related to cryptocurrency and blockchain technology.