Ten Cryptocurrency Legal Questions, Answered
What are cryptocurrencies?
Cryptocurrencies are digital, decentralized monetary structures, created and mined via blockchain technology. Most cryptocurrencies can be exchanged for Bitcoin — the most famous cryptocurrency — which can then be sold for US dollars and other fiat currencies.
Cryptocurrency Legal: Are Altcoins considered Securities?
Since cryptocurrencies hit the scene a question has loomed: Are virtual currencies subject to both the Securities and Exchange Acts? Unfortunately, the question is not easily answerable. Technically, no; officials have yet to brand digital currencies as securities. However, they have deemed certain cryptocurrency investment vehicles to be securities. The difference is razor thin, but crucial.
What characteristics make cryptocurrencies different than securities?
Several key factors make it difficult to characterize cryptocurrencies as securities.
- Since virtual money is created via blockchain technology, the traditional understanding of an “issuer” — a key component in securities’ transactions and legal definitions– is murky. Do cryptocurrency “miners” qualify as “issuers”? This issue must be resolved before digital currencies can qualify as securities.
- The most common financial security is stock. By definition, stocks spawn apportioned dividends and represent a transferable share in a collective enterprise. Cryptocurrencies, however, don’t represent proportional ownership of a company.
- Ether, Bitcoin, and other virtual currencies don’t require a counterparty. According to Investopedia, “A counterparty is the other party that participates in a financial transaction [and] every transaction must have a counterparty in order for the transaction to go through.”
- Current securities’ laws require “the existence of a certificate.” Cryptocurrencies, however, aren’t a certificate-based financial instrument.
- Digital token sales don’t represent a continuing agreement between sellers and buyers; buyers can do whatever they want with their altcoins. As such, virtual monetary systems don’t qualify as bonds or debts, once again positioning them outside the securities’ umbrella.
- Cryptocurrencies don’t necessarily qualify as “investment contracts” because:
- Outside factors affect token value;
- Sellers aren’t obligated to act for the “common group of purchasers”; and
- The jury is still out as to whether or not cryptocurrencies meet the “common enterprise” standard for investment contracts.
What would happen if officials deemed digital currencies to be securities?
Knighting cryptocurrencies as securities would mutate the virtual money market — maybe even annihilate it. Why? The SEC would likely force miners to register as traders or investment brokers. Plus, the currencies would be inherently subject to regulations delineated in the Securities and Exchange Acts.
What does the SEC think of cryptocurrencies?
Bluntly speaking, the Securities and Exchange Commission is not singing cryptocurrency’s praises. In fact, the agency once issued an “alert” entitled Bitcoin and other Virtual Currency-Related Issues. It was the opposite of laudatory.
Has the SEC ever brought actions against a cryptocurrency?
Thought the Commission has successfully acted against investment vehicles that leveraged digital funding, the SEC has yet to bring an action against a cryptocurrency merely for being a cryptocurrency.
How do cryptocurrencies guard against hackers?
How safe are cryptocurrencies? Aren’t hackers able to steal digital money? The answer to both those questions is “yes.” Yes, blockchain technology is incredibly secure — thanks to its decentralized structure that withstands the Byzantine fault tolerance test. And yes, hacking is a problem in the cryptocurrency community. Parties are looking to exploit software vulnerabilities — not in blockchain itself, but in the software programs created on top of blockchain. One famous cryptocurrency hack resulted in a $50 million theft, resulting in a controversial hard fork of the Ethereum platform.
How Do People Execute digital transactions?
Blockchain technology allows for “smart contracts,” which are essentially automatic digital agreements.
What geopolitical factors currently make cryptocurrencies attractive?
As the world becomes more connected, some fiat currencies are in a state of flux. Moreover, the digitalization of communication and commerce naturally gives way to the inevitability of a virtual, decentralized, universal currency.
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