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Why SEC Is Wrong to Class Cryptocurrencies as Securities

2 mins
Updated by Geraint Price
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In Brief

  • Charles Hoskinson argues that it is unfair to call ADA a security based on claims by Bitcoin and Ethereum maxis who insist those tokens aren't.
  • Pro-crypto lawyer John Deaton agreed since US securities laws suggest that the way an asset is used can be an unregistered securities offering.
  • Cardano itself is not fully out of the control of Input Output Global until a new governance system is completed, Hoskinson said two weeks ago.
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Cardano (ADA) co-founder Charles Hoskinson has argued that regulators should not be blinded by maximalist claims that Bitcoin and Ethereum are not securities. ADA, Ripple (XRP), and any other token can be a security when used in an investment contract as defined by the 1933 Securities Act.

The US Securities and Exchange Commission (SEC) listed Cardano and 36 other cryptocurrencies as securities in its civil lawsuits against Coinbase and Binance. Ethereum and Bitcoin were notoriously absent from the list after the SEC unofficially speculated that Bitcoin was a commodity.

Debate on Ripple (XRP) Must Be Legally-Based

Maximalists like Michael Saylor have promoted the narrative of Bitcoin as a commodity. Because of its potential for alteration, Ethereum is “obviously” a security, Saylor once argued. By contrast, no one wants to change Bitcoin, making its properties fixed and, therefore, more akin to a commodity.

But John Deaton, a prominent legal voice in the tussle between crypto businesses and regulators, previously implied that a token’s use determines whether it is a security or not. The arguments from Bitcoin maximalists should not muddy the legal definition of an investment contract, he cautions.

Read more: What Is Bitcoin? A Guide to the Original Cryptocurrency

“A digital asset or cryptocurrency (software code), STANDING ALONE, is NOT security. It can be marketed, packaged, offered and/or sold as an investment contract, aka a security. Even if [some sales of Ripple (XRP)] was an unregistered securities offering], it doesn’t make the underlying asset – digital code – as security itself.” 

Deaton cited the initial sale of Bitcoin by Satoshi Nakamoto, its founder, as proof that Bitcoin, when packaged in a certain way, could be part of an unregistered securities offering.

“When Satoshi was the only miner of Bitcoin (or one of a few) and had he offered 100K BTC for sale for $100K USD, it would have been an unregistered securities offering.”

Read more: Top 7 Upcoming ICOs To Watch Out for in 2023

As a result, one cannot conclude that an asset itself is or is not a security. The arguments for or against must have a legal basis.

Number of SEC Enforcement Actions
Number of SEC Enforcement Actions. Source: Cornerstone Research

“The industry can’t allow [chairman Gary] Gensler and the SEC and BTC maxis to keep pushing an unconstitutional shortcut by calling the tokens themselves securities.”

We Cannot Move on From One-Sided Decisions

Hoskinson agreed, saying democracy is not just accepting unilateral decisions that call one crypto a security and another not. He argued that, for example, despite maximalist claims that Bitcoin is completely decentralized, the reality is that anyone who can subpoena three entities can mount a so-called 51% attack on Bitcoin.

But until developers finish Cardano’s roadmap, Input Output Global makes many of its decisions. The Cardano Foundation is still responsible for the development of certain components of the ecosystem, including a recent ballot program. Two weeks ago, Hoskinson confirmed the ballot system would lay the foundation for community governance.

Do you have something to say about Hoskinson, the security status of Ripple (XRP), Cardano (ADA), or anything else? Please write to us or join the discussion on our Telegram channel. You can also catch us on TikTokFacebook, or X (Twitter).

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...