Matthew O’Neil of Toronto is an attorney who notes that as the popularity and influence of cryptocurrencies grow, so do concerns surrounding their security. In the following article, Matthew O’Neil dives into the intricate world of cryptocurrencies, exploring the evolving landscape of digital currencies and the pressing issue of security.
Cryptocurrencies — are they securities? This question has circulated the niche for nearly as long as Bitcoin itself. And the debate is still ongoing.
Crypto’s popularity raises confusing regulatory and financial problems across the United States of America. With little authoritative clarity, two sides of the debate stand strong on their opposing sides of the metaphorical dodgeball court. Some say cryptocurrencies are securities, while others argue they’re commodities.
To achieve regulatory clarity, policymakers must define whether digital currencies fit in the security or commodity box as this impacts how and by whom they’re governed. Currently, Matthew O’Neil of Toronto says that the only transparency lies in the realization that both sides make compelling arguments.
Matthew O’Neil on Understanding Securities and Commodities
Securities and commodities are entirely different financial instruments regulated by two distinct government organizations in the US. Fitting crypto into one or the other details how it can be sold, where it’s listed, and who can sue if a provider oversteps the boundaries.
However, despite the instruments’ differences, their characteristics mean cryptocurrencies can fit in both to some degree.
Securities
Matthew O’Neil of Toronto explains that securities are regulated by the Securities and Exchange Commission (SEC) and represent an issuer claim like stocks, bonds, and derivatives. And as of the iconic lawsuit in 1946 (SEC v W. J. Howey Co.), US law defined securities sales as investment contracts. In other words, the investor expects profits due to the efforts of the third party or promoter. As time goes on, investors realize the profit through security sales, collecting dividends, or receiving interest payments.
The outcome of the landmark lawsuit created the “Howey Test” that aims to assess whether something qualifies as securities. According to the Test, for an asset or transaction to be deemed a security, it must adhere to this — monetary investments in a common enterprise with an expectation of profits to be gleaned from others’ efforts.
Commodities
In contrast, Matthew O’Neil of Toronto says that commodities are physical goods bought and sold on exchanges in wholesale quantities, including agricultural products (e.g., corn and wheat) and precious metals (e.g., silver and gold). They’re usually traded for the present market value.
The Commodity Futures Trading Commission (CFTC) polices specific wrongdoings in this area. However, the agency doesn’t boast a broader regulatory authority over spot trading like the SEC has over securities.
The Crypto Security VS Commodity Debate
Matthew O’Neil of Toronto explains that the aforementioned Howey Test is often used by people arguing the security side of the coin. However, even that somewhat straightforward criterium sparks ambiguity amongst debaters. Regardless, examining each section of the Test proves beneficial to some degree.
- Investment in Money — Crypto fits here. It involves investing money with different individuals getting involved.
- Common Enterprise — Matthew O’Neil of Toronto notes that this is where it becomes cloudy. In many ways, there’s no need for third-party expertise to profit from cryptocurrencies. But some argue that crypto lending services, wherein people lend money and expect profit based on the exchange’s working methods, offer exactly that.
- Profit Expectation — If the crypto investment aims to make a profit, it passes. However, many people are using digital currencies to store wealth (i.e., stablecoins), so it wouldn’t pass this part.
- Profit Gleaned from Others’ Efforts — If investors put in a lot of time and effort for investments to succeed, it isn’t a security. And many state cryptocurrencies don’t pass the fourth test as there isn’t a third party involved in providing profits. Like the stock market, no organization is actively trying to make investments work; it’s just about the overall sentiment and investor activity. But there’s also an argument to say it does fit the criterium. Stablecoins, for example, boast active communities who ensure their stability, passing this test. Couple that with staking and lending services and some conclude there are a few third-party involvement.
Matthew O’Neil of Toronto says that perhaps unsatisfactory for some, there isn’t a concrete answer as to which side is correct — it’s an ongoing cacophony. Cryptocurrencies overlap aspects of both securities and commodities, leaving ample scope for a myriad of results.
A Regulatory Conundrum with Many Outcomes
Matthew O’Neil of Toronto says that congressional efforts have focused on allowing the CFTC greater responsibilities to regulate spot trading of non-securities tokens. At the moment, Bitcoin is the only one that’s been openly agreed upon. However, the lawsuits involving crypto and the SEC have muddied the idea that digital currencies are solely commodities or securities.
With many potential outcomes, like regarding crypto as its own asset class or some coin types categorized as securities and others as commodities, policymakers must clear the waters for transparency and regulatory ease.
