Is it 1946 All Over Again? SEC Crypto Jurisdiction Claim

History does not repeat itself, but it sure does rhyme.

Cryptocurrencies have proved to be very resilient. Despite the inherent volatility, cryptocurrencies have shown a unique ability to adapt and survive setbacks, and it is likely to continue this way for years to come.

At its inception, Bitcoin, the first cryptocurrency was ignored. As it gained popularity and wide acceptance as a means of payment and exchange, governments could not ignore it, and focus is being given to legal and regulatory issues.

The sheer size of the industry, security of investments, issues regarding some major players, along with some ongoing changes in the underlying technologies behind different cryptocurrencies, as well as its acceptance as a means of payment and exchange, have made blockchain and cryptocurrency a topic of interest for the government, institutional investors, regulators, and legal professionals.

?Is Crypto a Scam?

It is no doubt that blockchain and cryptocurrency are major advancements or innovations in recent times. Largely compared to the rise of the internet in the 1990s. Just like the internet, at first, it was ignored and considered temporal until it became too big to ignore.

Likewise, Bitcoin, the first cryptocurrency and application of blockchain technology was largely ignored, later condemned, termed criminal, and now widely accepted as a means of payment and exchange.

Cryptocurrencies themselves, from being merely speculative asset has taken several shapes and use cases (Helium-for internet, Hivemapper- a decentralized mapping system, that offers drive and earn benefit, among other blockchain use cases and projects). From a full-blown Decentralized Finance system (DeFi), governance in the of DAOs, to Arts, in the form of tokenized assets- NFTs, and in recent times, being the foundation of new internet technology, the Web3, and the metaverse.

The rate of innovation has been phenomenal, as should be expected in a low-regulated environment, but this has not been without challenges. Scams, and malicious actors, in the absence of government oversight, have thrived, leading to millions, and even billions loss in investment.

?What’s the Case Against Crypto?

Crypto has been termed as a currency used in criminal activities when in the real sense data from Chainanalysis reveals that 0.15% of all crypto transactions in 2021 were associated with illicit activity, while the U.N. estimates that between 2% and %5 of fiat currency is linked to some form of criminal activity.

The purported lack of transparency of crypto transactions is also not true, as a majority of crypto transactions are traceable and available to the public.

What’s the State of Crypto Regulation Around the World?

Cryptoassets remain largely unregulated around the world. The major exception is that some countries/regions require businesses to engage in cryptocurrencies to be compliant with anti-money laundering regulations. UK requires additional registration with the FCA for such companies to operate. Buying and selling cryptoassets may lead to tax liabilities like Capital Gains Tax.

Many regulators around the world are very keen on regulating cryptocurrency, like the SEC in the US, while some have outrightly banned crypto like in Africa.

No thanks to the Celsius debacle, governments’ drive to regulate crypto has gained impetus. In the UK, the government announced greater legal recognition for stablecoins, which are usually pegged to a fiat currency or asset. This would pave a way for the UK to recognize stablecoins as a form of payment. Along with other regulations to be put in place, the government tends to make the UK a “crypto hub”.

The implementation of the Financial Services and Market Bill seeks to introduce a new regulatory framework for stablecoins.

Will Regulation Do Crypto Any Good?

Crypto is still regarded as a very risky and volatile investment, which is true. Most blockchain projects offer utility and beyond price appreciation, it would be fair to consider this also.

Regulation in the industry will be beneficial in a couple of ways, such as;

·???????Protection and support from the government against any improper conduct, failure of a project, or exchanges

·???????Create a higher threshold of entry for businesses and firms entering and operating in the crypto space

·???????Attract institutional investors such as banks, that have stayed away from cryptocurrencies due to the unregulated nature

·???????Provide a framework that will lead to mainstream adoption

Security and Exchange Commission (SEC) VS Crypto

No government or regulatory bodies has been a pain to crypto like the SEC. SEC seems to be around every corner seeking opportunities to take a dig at crypto and is the foremost body that seeks to regulate crypto.

To understand the fight against crypto, the orange business is a good place to start.

In the aftermath of the 1929 stock crash, the Securities and Exchange Act of 1933 provides a long list of things that can count as securities, but it never spelled out what an investment contract is. The US Supreme Court provided a definition in 1946, due to a case that involved a Florida business called Howey Company. The company owned a big plot of citrus groves. It gave people the chance of buying portions of its land in order to raise money. A 10-year service contract was signed along with the land sale. The buyers would get a cut of the company’s profits, while Howey Company would handle all the work of cultivating and selling the fruit, and keep control of the property.

Then came the SEC in the 1940s, and sued the company, saying that its supposed land sales were investment contracts and therefore unlicensed securities (I guess this ring a bell, as we have seen something like this in recent times). The court ruled that just because Howey Company did not offer literal shares of stock, did not mean it was not raising capital. The court stated that it would look at the technical form rather than looking at the “economic reality” of a business deal. It said that an investment contract exists whenever someone puts money into a project expecting the people running it to gain profit on that money.

Applying this to the case, the court ruled since most people that bought the land would never step foot on it, Howey Company had offered investment contracts. The economic reality of the situation was that the company was raising investment under the pretense of selling property. The court concluded, “Thus all the elements of a profit-seeking business venture are present here. The investors provide capital and share in the earnings and profits; the promoters manage, control, and operate the enterprise.”

That was the origin of the so-called Howey test- The approach that courts follow to this day. There are four parts to the Howey test.

Something counts as an investment contract if it is;

-?????an investment money

-?????in a common enterprise

-?????with the expectation of profit

-?????to be derived from the efforts of others

Basically, saying that you can’t get around securities law just because you didn’t use the words “stock’ and “share”.??????????

?This brings us to the SEC Ethereum jurisdiction claim

SEC VS Ethereum

According to SEC Chairman Gary Gensler, proof-of-stake (PoS) cryptocurrencies could qualify as securities under the Howey Test. Gensler said that the native assets of PoS blockchains, which allow holders to passively earn returns through staking, could pass the Howey test. This puts Ethereum, Cardano, and Solana under the category of securities, and therefore subject to federal security laws.

What’s the difference between PoS and PoW in Relation to SEC?

Proof-of-stake blockchains work by having participants stake their coins, which basically lock up their crypto assets to process transactions and keep the network secure.

Proof-of-work (PoW) cryptocurrencies like Bitcoin, use mining as the process for validating transactions and keeping the network secured.

?Expert View

Coin Center, a crypto policy non-profit said, “Central to classification as a security is ongoing reliance for profits derived primarily from the efforts of others,” and “Both consensus mechanisms [proof-of-work and proof-of-stake] are explicitly designed to avoid any such reliance by creating an open competition amongst strangers wherein any self-interested participant can and will fill the gap left by any other unresponsive, corrupt, or censorious participant”.

?This reminds us of Ripple.

SEC VS XRP

XRP is the token issued by the company. XRP is a cutting-edge technology that allows businesses to streamline cross-border payments and other financial services.

Ripple was sued by SEC in December 2020, accusing the executives of selling an unregistered security.

Ripple says XRP is not a security, rather it is a different kind of investment category: commodities. Asset classes like gold, diamond, silver, oil, crop and the like are usually referred to as commodities. The legal counsel of Ripple says that buying an XRP token is more like buying a diamond than it is buying a Ripple stock. He points out that XRP doesn’t give a stake in the company or share of its profits.

Crypto regulation has been on the horizon for a while. One thing the industry has been doing is making effort for the SEC to issue new digital-currency-specific rules. Also, in the Senate, there are bills that seek to transfer power from the SEC to the Commodity Futures Trading Commission, which is more industry-friendly than the SEC.

Some argue that this will create an environment where innovation and industry will thrive, while also crafting a regulatory regime that protects investors.

Is regulation such as bad thing?

The proper regulations in place could potentially help crypto in attracting institutional and mainstream adoption, as well as help protect investors from irresponsible projects and fraudulent actors.

Who decides what’s sufficient regulation? At what point should the government stop? Like the CEO of FTX, Sam Bankman-Fried said “It is important and it is healthy for the industry (crypto) to be regulated…if you give oversight of various aspects of the industry that do not have sufficient oversight, it is important to do so in a reasonable and common-sense way (to people) that understands the industry. Basically saying, you can’t regulate an industry you have little expertise in.

?Apart from seeking an understanding of the industry, it is important that the governments collaborate with stakeholders and experts in the blockchain and cryptocurrency industry, to ensure successful regulation, and not constrain the potential of cryptocurrency. In the words of Liz Truss , before becoming the Present UK Prime Minister, she tweeted back in 2018, crypto should not only be welcomed but should also be welcomed in a way which doesn’t constrain their potential”.

What point will the line be drawn?

Over-regulation is seductive to governments as control could be intoxicating, applying political pressures without taxing and spending. The costs are borne by the private sector and the ultimate price is paid by innovation.

It remains the biggest obstacle to a dynamic free-market economy.?

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