Are Cryptocurrencies Securities?

A company that wants to raise capital from investors will typically do so by selling shares or borrowing money. Either way, it is issuing securities (selling investments) and is therefore subject to securities legislation. It has to file a prospectus with and/or become licensed by the authorities or otherwise rely on an exemption.

But what about a firm that raises cryptocurrency, rather than cash, from investors? For example, what if you could purchase a stake in a business with Bitcoin instead of by writing a cheque? Is that still considered trading in securities? Is that transaction bound by regulation from securities authorities?

The short answer is: most likely.

What is a security?

The USA defines a “security” as follows:

Any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

In July of 2017, following an investigation of a company raising capital through a virtual coin called The DAO, the US Securities and Exchange Commission (SEC) noted that:

Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.

That means a company can’t bypass the law by accepting a cryptocurrency instead of cash. If it is offering an ownership or creditor position in a business venture in exchange for payment, it is soliciting securities. It must follow the same rules as all other issuers.

Cryptocurrencies have not yet received a lot of attention from securities regulators in other countries. I know of few formal rulings or notices that specifically declare them as securities. However, the SEC’s position makes sense and will likely be replicated across capital markets. The authorities would not allow businesses to circumvent rules that are designed to protect investors simply because they are using a different method of payment.

So what does this all mean?

It could mean that most cryptocurrency investment opportunities, including Initial Coin Offerings and Token Sales, are illegal. To be compliant, they will have to follow securities legislation.

However, I am not sure that that is even possible. Regulations mandate disclosure and transparency, which is the antithesis of the cryptocurrency world. If a company wants to raise capital en masse, it not only has to disclose sensitive business and financial information, but it also has to know who its investors are. It can’t simply accept money from any person, at any time, from any place in the world. The fact that many cryptocurrency enthusiasts are so because they can hide their identities does not mesh with the securities industry.

About The Author

Alexis Assadi

Alexis Assadi is an investor, entrepreneur and writer, who advocates for making high-performing income investments and the lifelong pursuit of financial intelligence. He is a shareholder and director in three companies that provide funding to small businesses, entrepreneurs and real estate projects. His most recent venture is a firm called Pacific Income LP.

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