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What Are the US SEC Cryptocurrency Regulations?

The United States Securities and Exchange Commission (or, simply, SEC) regulates the financial security market at a federal level. Among the many topics that have caught the interest of the SEC, one cannot forget to mention the crypto and blockchain markets.

The existing SEC crypto regulations target several common aspects of this new industry, which is why no investor can allow ignoring these regulations. Therefore, while the world waits for a global policy on the sector, our article will deal with the main concepts clarified by the SEC in its official acts on the cryptocurrency market.

The role of the SEC

The central concept that one needs to understand is that the SEC has regulatory authority over two operations in the crypto industry:

  • the issuance of a token constituting a security
  • the resale of a coin, if it is considered as a security

Before dwelling on this aspect, it is vital to understand financial security. In general terms, one can see guards as being investment contracts, with the idea of a money expense designed to collect profits.

There appears to be a significant debate among regulators worldwide regarding the legal nature of cryptocurrencies. Specifically, while some argue that cryptos should be seen as securities, others believe it would be fair to identify them as currencies.

The decision on the nature of cryptocurrencies is not a trivial one, as these instruments appear to possess features of both categories. Today, the SEC has not taken a definitive stance on the debate. 

However, the unofficial declarations of the Commission’s members appear to point towards the inclusion of cryptocurrencies in the security category.

While we wait for a more official update – which may come in the following weeks – we must remind the readers how important such a decision would be. Labelling cryptos as securities would imply the application of all the existing U.S. securities laws to the market. In general terms, the crypto investment would be much more regulated than it is now (with potential limits, for example, to the “pump and dump” phenomenon).  

What does the SEC think of ICOs?

While the definitive answer on the “currency vs. security” debate is not there yet, the SEC has notoriously broadly discussed and regulated Initial Coin Offerings (ICOs). The opinion of the Commission is that if a new token meets certain elements, it can actually be considered a security.

Consequently, the new token would fall under the Securities Act of 1934. But what about the cases where it cannot apply the Securities Act? This may depend, for example, on the impossibility of claiming that a particular token is a security.

Fewer restrictions are placed only in the case of the so-called “accredited investors”, distinguishing them from the “retail investors”. Considering the notorious higher financial resilience of larger professional investors – mainly given by a combination of high liquidity and market experience – this decision should not surprise anyone.

By interpreting SEC Rule 501(a), accredited investors are those who:

  • work as executives of the company issuing the token
  • have a net worth exceeding $1 million, once excluded the value of the investors’ primary residences
  • have recorded an individual income above $200,000 in the previous two years from the assessment date (or it is reasonable to expect them to move above this number in the current year)
  • have recorded a joint income above $300,000 in the same timeframe previously mentioned.

SAFTs – what are they, and are they accepted by the SEC?

The SAFT acronym stands for “Simple Agreement for Future Tokens”, and it is a particularly popular term in the U.S. crypto market. Through these agreements, investors can put money into a crypto start-up with the promise of actually receiving new tokens.

We can see the investment in SAFTs as something close (but not exactly equal) to the purchase of equities in a small company. In general, small start-ups have several ways to collect capital for their projects, especially with the growth in the venture capital sector. What smaller companies cannot afford to do is, in general, list themselves on the stock market.

The SAFT protocol enables smaller crypto companies to distribute token rights before the coins are created. This is something that the SEC appears to like much more than a classic ICO since the latter has a mechanism that seems complicated to regulate on the market.

Among the many characteristics of SAFTs, it is essential to note that they are only negotiable by accredited investors (as previously defined). This goes towards the favour of the SEC, as it provides a clear distinction among traders and indirect protection for retail investors.

Cryptocurrency US – Final thoughts on the SEC regulations

Ever since the rise of Bitcoin (BTC), the world has tried to find the best way to regulate the crypto sector. While the market may have controversial views on how cryptocurrencies will behave in 2022, the regulator is keeping an attentive eye on the industry.

Regulating a rapidly-changing market such as the crypto one is undoubtedly a great challenge for the SEC and the other authorities worldwide. While the SEC has often claimed that cryptocurrencies can be considered securities, it has, so far, delayed an official decision on the matter.

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Financial regulation aims to protect the investors on the markets, and measures such as the SAFT protocol move towards this direction. However, it remains to be seen how the SEC will behave in the future and whether it will effectively contribute to realizing a global policy to regulate the crypto market better.

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