The growing popularity of cryptocurrencies has led to a lot of heated debates about how they should be defined and regulated.
The argument centres on whether cryptocurrencies should be classified as securities – and the answer could have major ramifications for the way the world of digital assets operates going forward.
This is because anything classed as a security is regulated – in the US by the Securities and Exchange Commission (SEC) and in the UK by the Financial Conduct Authority (FCA).
Many people argue this goes against the very nature of cryptocurrencies, which are anonymous by design, are not governed by any single authority, and aim to be free of centralised regulation.
What is a security?
To understand whether cryptocurrency is a security, it’s important to understand what a security actually is.
A security is a tradable financial asset that has monetary value. It represents an ownership position in a publicly-traded corporation (via owning shares), a creditor relationship with a government body or a corporation (via owning bonds), or rights to ownership as represented by an option.
The legal definition of a security varies by jurisdiction. In the US, a security is a tradable financial asset of any kind.
In the UK, the FCA’s definition of a security applies only to equities, debentures, alternative debentures, government and public securities, warrants, certificates representing certain securities, units, stakeholder pension schemes, personal pension schemes, and rights to or interests in investments.
The crypto security debate
The SEC has been fairly open in its ponderings about whether cryptocurrency is a security.
Under US law, a security includes an “investment contract” – which is defined as an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
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