The Role of Securities Litigation in the Cryptocurrency World

The rise of cryptocurrencies in the financial scene has brought both challenges and opportunities, leading regulatory bodies to adapt and establish guidelines for this landscape. The US Securities and Exchange Commission (SEC) is one of those regulatory bodies that aims to make the crypto landscape cleaner. The SEC’s role in regulating cryptocurrency is crucial for protecting investors and maintaining market integrity.

Are cryptocurrencies considered as securities?

According to SEC Chair Gary Gensler, the majority of crypto can be considered as securities based on the Howey Test, which the US Supreme Court uses to determine whether a transaction qualifies as a security. The Howey Test consists of four criteria that an asset must meet to be qualified as an investment contract. These criteria are as follows:

• Investment of money: A monetary investment or something of value must be involved in the transaction.
• Expectation of profits: A financial gain must be expected from the investment.
• Common enterprise: There must be a financial relationship between the investors and the enterprise behind the transaction.
• Success from other’s efforts: The investment’s success hinges primarily on the efforts of individuals other than the investor.

The Importance of SEC Enforcement in the Crypto Space

The need for SEC enforcement in cryptocurrencies is crucial for protecting stakeholders, ensuring market stability, and providing transactional clarity in the dynamic digital financial landscape.

SEC enforcement can be analyzed in various key areas:

• Protection Against Fraud

The SEC actively investigates and takes legal action against crypto fraud to prevent misconduct and protect investors, applying securities laws to ensure accurate information disclosure and empower informed decision-making in the cryptocurrency markets.

• Maintains Market Integrity

Price manipulation in the cryptocurrency market might occur due to its anonymity and lack of regulation. With the SEC overseeing the crypto market, it prevents these unusual activities, thereby helping maintain market integrity and fostering investor trust.

• Continuous Monitoring and Adaptation

The SEC remains vigilant amidst the rapid evolution of the crypto market, adapting its regulatory approach to new developments. SEC regulations aim to legitimize crypto enterprises, potentially attracting traditional investors and institutions and fostering broader adoption.

• Regulatory clarity

Establishing clear boundaries between traditional securities and crypto assets promotes clarity for both entrepreneurs and investors. The SEC’s compliance standards help crypto enterprises navigate regulations and mitigate legal uncertainties.

• Exchange Regulation

Cryptocurrencies are global and borderless, which necessitates cross-border collaboration. Exchanges listing securities tokens must register with the SEC as national securities exchanges, ensuring secure and legally compliant operations. International cooperation in enforcement addresses challenges for a harmonized regulatory approach in cryptocurrency.

The Effect of SEC Regulation on the Crypto Market

• Reduced Appeal for Investing in Crypto Assets

Stricter financial transaction oversight can reduce the investment attractiveness of numerous crypto assets, potentially causing capital outflows and a significant drop in values, which can lead to the collapse of the entire crypto industry.

• Increased Security of Crypto Trading

Enforcing strict crypto regulation is expected to help enhance security in trading and related activities, streamlining the identification process, and reducing the likelihood of fraudulent actions.

• Limits the Use of Crypto Products

SEC’s regulation may also result in restrictions on using crypto products, including staking, lending, crypto lending, or trading in future contracts. Theoretically, systems may emerge to assess a specific trading instrument’s availability to an investor through special tests or evaluation systems, influencing decisions on trading permissions.

• Reduced Volume of Crypto Transactions

SEC’s regulatory policies can significantly impact the daily volume of crypto transactions, potentially reducing the advantages of utilizing blockchain technology.

Securities litigation plays a crucial role in protecting investors and minimizing fraudulent activities in the cryptocurrency landscape. As the crypto market continues to evolve, the need for robust regulatory frameworks and enforcement mechanisms becomes increasingly evident.

Gain more insights into securities litigation in our webcast: Securities Law in Focus: A Look Ahead at the Shaping Litigation Trends in 2024