Are cryptos securities or commodities? Even the SEC isn’t sure

Picking his words carefully.
Picking his words carefully.
Image: Reuters/Jonathan Ernst
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Cryptocurrency regulation can evolve as a project matures. At least that’s the view of Jay Clayton, the chairman of the US Securities and Exchange Commission, who suggested in a recent letter (pdf) to a congressman that a digital coin can transform from a security into a commodity.

Clayton’s newly revealed opinion matters, because for US cryptocurrency investors, the distinction between a security and a commodity is critical. The nature of the asset determines whether the SEC or the Commodity Futures Trading Commission has regulatory jurisdiction. If a token is deemed a security, and thus regulated by the SEC, then its creators can be liable for holding an illegal, unregistered securities offering. Punishments and fines can set a project back, or quash it entirely. Consequently, crypto developers are eager to avoid the security designation.

Bitcoin, the most recognizable cryptocurrency, was deemed a commodity by the CFTC in 2015.

But ether—the second most popular token behind bitcoin—has yet to be designated. Complicating matters is that ether isn’t just a crypto-currency but as the “fuel” for the ethereum network, ether can be used to create new tokens. Users can also spend ether to interact with “smart contracts,” pre-programmed codes for automatically distributing crypto funds. Developers claim ether could eventually become the foundation of a blockchain-based internet.

These additional features have put ether at the heart of the security versus commodity debate, especially as more developers have flocked to the platform.

In his letter to Rep. Ted Budd, a Republican from North Carolina, Clayton addresses the larger question about cryptocurrencies while sidestepping the ether question.

“I agree that the analysis of whether a digital asset is offered or sold as a security is not static,” he writes.  “A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition.”

Clayton appears to be leaving the door open for ether to be regulated as a commodity, but by declining to comment on it directly, he’s leaving the currency in regulatory limbo. Ether investors should put their champagne back on ice.