·  Legal News, Analysis, & Commentary


Does the SEC Regulate Bitcoin (or Other Cryptocurrencies)?

— November 24, 2021

The U.S. authorities have been slow to make a decision on how cryptocurrencies should be regulated in the country.

The Securities and Exchange Commission (SEC) is the United States regulatory agency with governmental jurisdiction over investment securities. This authority began in 1934 with expansion to regulate all Wall Street transactions after the stock market crash of 1929 during the early stages of the Great Depression. Through delegation, this authority has evolved to expand to cover most aspects of financial regulation within the United States.

Does the SEC Currently Regulate Crypto?

The SEC has not yet made any official statement on whether or not Bitcoin, Ethereum, Litecoin, Dash, Zcash or any other cryptocurrency falls under their regulatory responsibility. (Source) Under current statutes and rulings , it is unlikely that these cryptocurrencies will be regulated by the SEC unless they are seen as an investment security in the eyes of the SEC.

The concept of cryptocurrency is still relatively new to lawmakers and many are trying to figure out how they fall under the current definition of a security. The closest rulings that provide concrete examples are in regards to stock trading within Initial Coin Offerings (ICOs). ICOs involve traders purchasing tokens which represent value in an organization, company, or project rather than buying stock in it under the typical investment security. Many ICOs have already been deemed illegal and some companies are starting to refund investors due to SEC pressure.

The SEC has yet to make a clear statement on whether or not cryptocurrencies will be classified as securities, but rulings such as those for ICOs give insight into how the SEC views cryptocurrencies.

The SEC has sole jurisdiction over security trading in the United States, so they are responsible for protecting investors against bad actors and ensuring that companies follow necessary guidelines. The lack of widespread regulation has led to a significant number of scams involving cryptocurrency . If cryptocurrencies were regulated as securities under the 1934 Securities Act , this would require all trades to be performed by licensed investors and recorded in a central, regulated database. Though extreme cases like Silk Road make this seem like a benefit, it would also cause significant issues for the future of cryptocurrencies. Rather than allowing people to regulate themselves through the market, the SEC would assume this role and have significant control over how cryptocurrencies operate within their jurisdiction. This would cause a loss of privacy and anonymity for cryptocurrency users as well as stifle future innovations.

Currently, cryptocurrencies not listed as securities are still subject to similar guidelines as regular currencies . The lack of regulation has allowed for innovation in the industry, but it also means that there is little protection or recourse for those who become defrauded. If cryptocurrencies were to be regulated as securities, then protections and regulations that come with it would need to be applied. At which point, if you were to be a victim of investment fraud, you could work with a nationwide securities & exchange commission defense law firm.

The lack of regulation for cryptocurrencies has led to impressive gains in the past year. If they continue to be unregulated, we expect this trend will continue. However, if the SEC deems them securities, such gains may evaporate as most would not be able to trade. This regulation would likely cause cryptocurrencies to become a commodity rather than a currency and ultimately lessen their impact on the global economy.

Why are Investors Investing in Cryptocurrencies?

Cryptocurrencies are decentralized forms of currency that are not owned by any single entity. They are maintained through a process called mining in which computers around the world validate transactions and update the blockchain with each transaction . The validity is verified through consensus between the majority of miners, meaning that no single party has control over cryptocurrencies. This allows for transaction records to be maintained without the need for any sort of intermediary authority.

This decentralization has led cryptocurrencies to be used in many different ways. The most popular form is as an investor commodity, with traders buying and selling between each other with little regard to the value of the cryptocurrency itself . These transactions are recorded on a public ledger called the blockchain , which shows how much value has been exchanged.

Instead of being regulated by a central bank, cryptocurrencies are self-regulated through the blockchain . This leads to lower fees when compared with other forms of currency exchange and allows for more secure transactions. It also means that no third party can control your money or freeze your accounts, such as the SEC. There are significant incentives for users to remain honest since any attempt at fraud is effectively broadcast to the entire network, but this verification process requires significant computational power.

The lack of regulation has led to an explosion in interest for cryptocurrencies. It has been a huge motivation for the rapid growth of the industry, but it also means that bad actors have significantly more power to scam users. Without regulation, investors do not have any recourse if they become cheated or lose their holdings. If cryptocurrencies were classified as securities by the SEC, this would likely cause significant issues in the cryptocurrency community and lead to reduced interest.

Will Cryptocurrencies Be Regulated by the SEC in the Future

Cryptocurrency Company Ripple Faces SEC Lawsuit
Photo by Ishant Mishra on Unsplash

The U.S. authorities have been slow to make a decision on how cryptocurrencies should be regulated in the country. The lack of regulation has led to impressive growth for the industry, but it also means that there is little protection for investors and traders if they become defrauded by bad actors. Without any sort of recourse, many users may lose faith in the industry and the lack of trust would cause significant issues for companies within the industry.

The Securities Exchange Commission has repeatedly stated that they may consider regulating cryptocurrencies as securities in the future . This would allow them to protect investors from fraud and ensure that there were regulations to prevent market crashes such as what happened with Mt. Gox in 2013-2014. However, this also means that cryptocurrencies would have to be centralized to fall under the Securities Exchange Commission’s purview, which would significantly reduce their worth for most users.

This is because decentralized currencies are much more difficult for governments to regulate than centralized ones. The lack of regulation has led many traders and investors to avoid using fiat currencies entirely, but a desire for regulatory oversight has led most companies to avoid the use of cryptocurrencies as well.

Join the conversation!