The Impact of Crypto Asset Classification: Security vs. Commodity (2024)

When it comes to crypto assets, their classification as either securities or commodities has far-reaching implications. This classification determines how they are regulated and what rules they must follow. In simpler terms, it affects how crypto assets are treated and what protections are in place for investors.

Commodities: Flexibility and Market Dynamics

When a crypto asset is classified as a commodity, it is treated like a tradable good. Here's what you need to know:

• Less Regulatory Burden: Commodities generally face fewer regulatory requirements compared to securities. While there are still rules in place to prevent fraud and manipulation, the regulations are generally less strict. This allows for more flexibility in trading and fundraising activities.
• Market Development: Being classified as a commodity can encourage market innovation, liquidity, and growth. The flexibility in trading and fundraising can attract more participants, leading to a more dynamic and evolving market.
• Price Volatility: Commodities, including crypto assets, are often subject to price fluctuations. This volatility can provide opportunities for investors, but it also carries risks. It's important to understand that commodity markets can be more unpredictable compared to securities markets.

Securities: Stringent Regulations and Investor Protection

If a crypto asset is classified as a security, it means it is treated as an investment contract. Here's what that entails:

• Regulatory Compliance: Securities are subject to strict regulations. This means that issuers of securities must meet certain requirements, such as registering with regulatory authorities and providing detailed information about their project, team, and financials. This transparency protects investors from potential fraud or scams.
• Investor Safeguards: Securities regulations are designed to protect investors. They include rules against market manipulation, insider trading, and other fraudulent practices. These regulations provide oversight and legal recourse for investors if something goes wrong.
• Trading Restrictions: Securities may have limitations on how and when they can be traded. For example, there may be lock-up periods or restrictions on selling the securities in certain markets. These measures are in place to prevent sudden price fluctuations and protect investors from potential losses.

The classification of cryptocurrencies as securities or commodities holds significant regulatory implications. If labelled as securities, obtaining licenses from regulators can be very challenging for issuers and exchanges that could be exposed to important fines. Before this happens, the exchanges may probably opt for delisting the respective cryptocurrencies from their platforms. And its main implications would be that the affected cryptocurrencies/projects will have very limited access to finance their projects. Becauseit becomes less liquid, meaning that it is more difficult to buy and sell. This can make it more difficult for investors to get in and out of the project, which can lead to lower trading volumes and lower prices.

Crypto Assets issuers primarily strategy to comply with securities laws is by embracing decentralization. When a cryptocurrency is developed in a manner where a securities regulator cannot identify a central, coordinated group accountable for increasing the token's value, it reduces the likelihood of being classified as a security. To navigate securities laws, the crypto industry emphasizes decentralization, eliminating centralized control over token value. Decentralized Finance (DeFi) projects utilize mechanisms like decentralized autonomous organizations (DAOs) and proof-of-stake consensus to engage participants in project growth.

The SEC provides ICO guidance, emphasizing factors such as speculation and lack of utility that can classify coins as securities.

Conversely, the Commodity Futures Trading Commission (CFTC) deems cryptocurrencies like bitcoin and ether as commodities. This determination relies on their interchangeability on exchanges, akin to identical sacks of wheat having equal value.

I hope by now you have a better understanding of the meaning and implications of crypto assets to be considered securities or commodities. The next important question to answer here would be, What Makes a Crypto Asset a Security or a Commodity? and Which is the criteria used to decide if it falls under one definition or the other?

This is exactly what I am going to cover in my next article! ⌛️🔜

So keep an eye out for it as we learn and stay informed together through the complex but exciting crypto space. 🔎📰