Traditional financial concepts of assets cannot be applied to crypto assets discovered United States Securities Exchange Commission in its prolonged considerations over inducted products based on these virtual currencies for the regular markets. The silent discovery by the regulatory body is that crypto assets are not of any commodity, collateral, person or entity but are simple technology-based “form of proof.”
Therefore the question before the regulatory authority is about the nature of framework or guideline that it has to issue for the use and adoption of cryptocurrencies such as bitcoin.
How to regulate bitcoin, when there is no ‘securitization’
Considering bitcoin is the output or has a function which is generated when a certain mathematical process is conducted, leading to its ownership, there are limitations with respect to regulations for trading in these ‘concepts.’ The output can be developed into another form as well as ‘token’ and this entity is then sold to any investor.
It is at this step that SEC can step in to regulate when these tokens are presented in markets as securities offerings. However, they have a bigger role to play especially in the space of tokens and smart contracts. In its statement on November 16, “Any entity that provides a marketplace for bringing together buyers and sellers of securities, regardless of the applied technology, must determine whether its activities meet the definition of an exchange under the federal securities laws.”
What is a security?
In simple terms, a security can be defined as an ‘investment contract’ where “an agreement between legal persons, creating obligations that are enforceable by law.” However token are neither legal entity nor are they enforceable by law and thus cannot be considered to be securities. But the SEC insists that there is scope for ‘newer’ laws since it can be viewed as a contract and as security as well. Typically property laws, as well as financial laws, are secured by effective enforcement by the government.
However, in the case of digital assets such as cryptocurrencies, there appears to be a lack of history and a global system of enforcement which will allow “internet” transactions in a “borderless system.”
The solution that cryptocurrencies offer is that they are larger than the boundary-limited transactions since they are not partly embedded by the law, nor are the result of legal jurisdiction.
SEC’s move to establish jurisdiction over crypto transaction will be possible only if they are able to establish the “legal entities” for such regulatory deployment.