The answer will have enormous consequences for the industry as it exists today. We explain why
, a crypto trading platform, and its founder, Changpeng Zhao, with the unregistered sale of securities. A day later, thecharged Coinbase, another trading platform, with operating an unregistered securities exchange. Ripple Labs, another cryptocurrency issuer, has been embroiled in a similar lawsuit pursued by thesince December 2020. The companies are among the largest in crypto, and their continued existence—and that of many other firms—may depend on the outcome of these lawsuits.
One set of criteria used to answer this question is the Howey test, which dates back to a Supreme Court case in 1946. The ruling, which went against W.J. Howey Co, a citrus-growing firm, determined that there are four elements of an investment contract: an investment of money, in a common enterprise, with an expectation of profit, based on the efforts of others.
The alternative, which most of the crypto industry would prefer, is that digital assets be treated as commodities or derivatives. That would put them underhas already agreed that bitcoin, which has no central entity that benefits from its growth, will be regulated as a commodity, even if it believes most other crypto assets are securities. Thesays ethereum, the second-largest cryptocurrency in circulation, should also be under its purview.
A new bill proposed by American legislators may change things. Two Republican congressmen, Patrick McHenry and Glenn Thompson, heads of the House committees on financial services and agriculture respectively, put forward a draft bill pushing for regulatory change earlier this month. The legislation would use the level of decentralisation of a given crypto asset as the benchmark for whether it should be counted as a security or a commodity, codifying the existing split more clearly.
Neither new legislation nor the lawsuits under way are likely to be resolved quickly. Ripple’s case has been continuing for two and a half years, and the company’ssays its legal bills will have run to $200m by the time it ends. Companies facing lawsuits are experiencing a swathe of withdrawals from their customers. Long before any legal verdict, the chilling effect of uncertainty will ripple through the industry, and is likely to have a huge effect on the entire crypto sector.
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