After the attack that the United States regulators launched this week against platforms such as Binance and Coinbase, there is an important debate, one that most of the world’s authorities do not quite define and has to do with how to classify crypto assets.
The old controversy, which revolves around whether cryptocurrencies are financial securities or notis the axis of the lawsuits that for several years the United States Securities and Exchange Commission (SEC) has been filing against various companies linked to the sector.
The agency accuses exchanges for allegedly trading unregistered securities. This is because, in his opinion, most cryptocurrencies are securities (security), a type of financial instrument that has intrinsic monetary value and that can be traded in the markets.
12 crypto assets are specifically mentioned in the recent lawsuits against Binance and Coinbase. Others have been cited in previous lawsuits, including the one launched in 2020 by the SEC against Ripple, the company behind the cryptoactive XRP. So far, bitcoin (BTC) and ether (ETH from Ethereum) They do not fall within the concept of securityaccording to the US regulator.
To determine whether an investment is a security, the SEC uses Howey’s testparameter that derives from the name of a judicial case that was debated in the United States in 1946.
The test of Howey identifies four fundamental characteristics to define a value. Among them, that it is offered in exchange for money, that there are expectations of profits, that the investment is focused on a common company and that the profits depend on the efforts of a promoter or a third party.
Exchanges, companies and members of the bitcoin ecosystem differ from the SEC’s approaches. They assure that since the Howey test is an old and typical tool of traditional finance, should not apply to the world of cryptocurrencies.
But as it is a new and disruptive technology, the classification range is wide and allows cryptocurrencies to also fit into other concepts, equally used in the world of finance.
There are those who say that they are merchandise or commodity, a basic good used in trade and interchangeable with other goods of the same type. They are also seen as money, a means of payment or as property.
The positions are diverse and show the dilemmas faced by regulators and the lack of clarity when dealing with these assets.
Until in the United States there are conflicting visions. This situation is evident when observing the clashes between the SEC and other agencies, such as the Commodity Futures Trading Commission (CFTC), which views cryptocurrencies as commodities.
Even in the midst of differences, also arise coincidences in the regulations that are already applied in various parts of the world. Let’s see what is said in the following countries.
In Malta everything depends on the Howey test
Malta has been qualified as the blockchain island of Europe thanks to a regulation favorable to cryptocurrencies established since 2018.
The fact made the country a pioneer in global regulation. Although, being a member of the European Union, it will soon have to transpose its laws to the Regulation for Cryptoactive Markets (MiCA).
5 years ago the local parliament approved and enacted three bills for crypto assets: the Digital Innovation Authority Law, the Innovative Technological Services and Arrangements Law, and the Virtual Financial Assets Law. It is this last law that regulates cryptocurrencies, defined as “form of digital media registration used as digital exchange, unit of account or store of value”.
To determine its classification, and decide whether a crypto asset is a security or not, regulators they act in a similar way to the US SEC.using the Howey test.
Financial instruments for the MiCA law
MiCA is the new regulation for the regulation of exchanges approved for 27 countries of the European Union that will enter into force in 2024.
The Act defines crypto assets as a “digital representation that can be transferred and stored electronically, using distributed ledger technology or similar technology.” He classifies them into four categories. The first covers most cryptocurrencies, including bitcoin and ether.
The two main crypto assets on the market are not regulated by MiCA, as they are defined as financial instruments under the framework of the Markets in Financial Instruments Directive (MiFID). There are the guidelines for issuers of bonds and traditional shares listed on European stock markets.
Based on this, the European Parliament prepared a report, after the approval of MiCA, proposing that all crypto assets are considered transferable security. Thus, the regulations that apply to stocks and bonds will have to be applied to cryptocurrencies.
UK: from exchange tokens to financial products
The United Kingdom is working on the definition of a regulation for the bitcoin ecosystem. Meanwhile, assigned to the Financial Conduct Authority (FCA) industry regulation.
The body distinguishes two types of crypto assets, regulated and unregulated. It also determines three categories of tokens: exchange, security and utility. The latter, as they meet the criteria established for electronic money, are not under the supervision of the FCA.
The situation is different for security tokens. Those that, when used as investment financial instruments, are classified as securities and its commercialization requires authorization.
On the other hand, exchange tokens, those that are used in a similar way to fiat currencies, “are not recognized as a legal means of payment” and are considered unregulated assets. Until now, BTC and ETH are conceived as exchange tokens.
However, this classification changes in the Financial Markets and Services Bill What Parliament is debating. In 2022, parliamentarians voted in favor of this proposal, which proposes recognizing BTC and other cryptocurrencies as regulated financial instruments and products.
The Swiss regulator’s position: “they are payment methods”
In Switzerland, a non-EU European country famous for its eco-friendly approach, authorities adapted their current laws for the regulation of the sector.
In 2018 the Swiss Financial Market Supervisory Authority ranked digital assets into three categories, which vary by function and transferability.
First of all, they are payment methods, classification where most cryptocurrencies enterwithout implying their recognition as legal tender.
Utility tokens are the second in the scheme and provide access to an application or service. Finally, asset tokens are foundwhose sale is subject to the Securities Law.
Goods in Japan, merchandise in Kazakhstan, securities in Malaysia
According to the precepts approved in 2017 by the Council of Ministers of Japan, cryptocurrencies are not financial instruments. are treated as assets, although for accounting purposes they are considered assets. The Japanese also recognize them as assets with functions similar to physical currencies: payment for goods and services and money transfer. In the same way, they can be exchanged for other currencies in exchanges or in direct exchange with other people.
Something similar is proposed by the Kazakhstan law proposal, where bitcoin and other cryptocurrencies are classified as merchandisebeing discarded as a means of payment, financial asset and financial instrument.
A different perspective comes from Malaysia, in Southeast Asia, where the government recognized crypto assets as securities. Since January 2018, cryptocurrency operations have been supervised by the Securities and Exchange Commission.
Variety of visions in Latin American projects
So far, El Salvador is the only country in Latin America with a specific regulation for cryptocurrencies. This, after passing a law in 2021 that makes the country stand out in the world for being the only one where bitcoin is legal tender.
In January 2023, a regulation for the rest of the cryptocurrencies was enacted. This is the Digital Assets Issuance Law, which clarifies that “none of these digital assets will be considered as security”.
Beyond El Salvador, only the bills that have been drafted in a few countries stand out in the region. In them divergent positions are repeated of the most advanced countries.
The classification of cryptocurrencies varies in the proposals. start with its acceptance as a means of payment according to a resolution issued by the Cuban government. Something that is also proposed in the regulations that will come into force in Brazil, granting legal status to payments with bitcoin and cryptocurrencies in exchange for goods and services.
The same occurs in the typification made in Panama, which recognizes bitcoin and some other cryptocurrencies as a means of payment. The project is pending review in the Supreme Court after being vetoed by the Executive.
In Uruguay the central bank project places BTC and ETH in the category of exchange virtual assets. The rest of the cryptocurrencies are grouped as virtual assets values (security), utility virtual assets (commodities), and stable virtual assets (stablecoins).
The classification of cryptocurrencies was left out of the proposals of two South American countries. In Colombia, the Senate debates a law to mainly regulate the operation of exchanges; while in Paraguay, where the project was vetoed and archived, the focus is on bitcoin mining.
