Revisiting the SEC Ruling on Whether Cryptocurrencies are Securities

In June 2018, the cryptocurrency community waited with baited breath for the Securities and Exchange Commission (SEC) decision on whether cryptocurrencies were securities, commodities, or something else.

If the commission treated them as securities, they would be subject to much greater oversight and regulation, and many U.S.-based holders would divest their holdings while incentives to innovate would decline. If, however, the SEC decided that cryptocurrencies were not securities, investors and innovators might find them even more attractive. In the end, the SEC reached a split verdict: The largest cryptocurrencies like Bitcoin and Ether would not be treated as securities but as commodities, and the newer Initial Coin Offerings (ICOs) would be treated as securities

Cryptocurrency markets viewed the decision as largely positive and as having given greater legitimacy to a still nascent space whose image is mired in ambiguity to some degree. Several other points are also notable about the decision.

First, it reflects the power of the market phenomenon known as first-mover advantage, in that coins that had already been disseminated widely received better regulatory treatment.

Second, the decision highlights the importance of having a large number of participants in the market for any commodity, such that they collectively provide greater stability to the market. This reflects the underlying reasoning of the SEC in treating the established coins as commodities: Their widespread use is a trait common to commodities.

Third, and most important, the SEC’s decision highlights the need to strike a balance between innovation and accountability. The SEC wisely chose to impose oversight on new coins, which are riskier than older ones. Striking such a balance represents an effort to spur innovation, but at a measured pace and in a way that avoids the accountability risks that arise from the absence of regulation.

The SEC’s judgment sets an example for regulators in other countries, where there is still lingering (though declining) doubt about how cryptocurrencies should be regulated. What’s more, the SEC’s logic is robust and avoids a one-size-fits-all regulatory regime that might have dissuaded both investors and developers from greater participation in cryptocurrencies. It also conforms with the SEC’s “commitment to capital formation

As recently as a year ago, the regulatory regimes for cryptocurrencies around the world were largely underdeveloped and reactive. But now, there is a growing sense of clarity about what sorts of regulatory approaches are appropriate to address the risks posed by a fast-moving innovation.

This post comes to us from Usman W. Chohan, an economist at the University of New South Wales, specializing in the structures of accountability in cryptocurrencies.