Is Cryptocurrency Like Stocks and Bonds? Courts Move Closer to an Answer. (2024)



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Federal judges are weighing whether digital currencies should be subject to the same rules as stocks and bonds. The outcome could shape crypto’s future in the U.S.

Is Cryptocurrency Like Stocks and Bonds? Courts Move Closer to an Answer. (1)

By Matthew Goldstein and David Yaffe-Bellany

Matthew Goldstein covers finance, and David Yaffe-Bellany covers the crypto industry.

For more than a decade, the pioneers of the cryptocurrency industry envisioned digital coins as an alternate branch of finance, a renegade sector that would operate outside the reach of big banks and government regulators.

But as digital currencies like Bitcoin and Ether became more mainstream, the crypto industry collided with a 1946 Supreme Court decision that created what is known as the Howey Test, a legal analysis that determines when a financial product becomes subject to the same strict rules as stocks and bonds.

In recent years, regulators have seized on that legal precedent to argue that cryptocurrencies are just another security, like shares of Apple or General Motors. The crypto industry has fought back, leaving it in a legal gray zone with an uncertain future in the United States.

Now the long-running dispute is edging closer to a resolution, as federal judges begin weighing in on a series of lawsuits by the nation’s top securities regulator against some of the largest crypto firms. This month, judges held hearings in two of the most consequential cases, which could dictate whether the multitrillion-dollar crypto industry can continue growing in the United States.

The legal battles are “an existential issue for crypto,” said Hilary Allen, a professor at American University who specializes in financial regulation.

The court fights intensified over the last 18 months, as the Securities and Exchange Commission brought enforcement lawsuits claiming that crypto companies were operating as unregulated securities businesses. In response, the industry argued that laws governing Wall Street trading shouldn’t apply to digital currencies. Both sides scored early court victories that left the matter unsettled.

But this month, federal judges held hearings in two cases that legal experts expect to be more decisive: the S.E.C.’s lawsuits against the crypto exchanges Coinbase and Binance, which explore the core issues in the broader legal battle. Preliminary rulings in those suits are expected in the coming weeks, setting the stage for litigation that could ultimately reach the Supreme Court.

“We built our legal strategy around” a possible Supreme Court showdown, said Paul Grewal, Coinbase’s chief legal officer. “These are issues that have potential implications for huge swaths of the economy.”

How the courts rule could determine whether the crypto industry can burrow deeper into the American financial system. If the S.E.C. prevails, crypto supporters say, it will stifle the growth of a new and dynamic technology, pushing start-ups to move offshore. The government has countered that robust oversight is necessary to end the rampant fraud that cost investors billions of dollars when the crypto market imploded in 2022.

“The history of the crypto markets shows that investors are at risk and are being hurt by these platforms’ utter disregard for regulatory requirements,” said Stephanie Allen, an S.E.C. spokeswoman.

Crypto’s origins date to 2008, when a developer known by the pseudonym Satoshi Nakamato created the software behind Bitcoin. Early advocates envisioned crypto as a decentralized alternative to traditional finance, a communal project run by a wide network of people scattered across the world.

But as the industry matured, companies resembling traditional finance firms started developing cryptocurrencies and marketing them aggressively. Enthusiasts bought the digital coins in the hope that they would surge in value. The government viewed the emerging sector as an unregulated version of Wall Street, rife with fraud and manipulation. Last year, the S.E.C. filed 46 crypto-related enforcement actions, according to Cornerstone Research, a consulting firm.

The S.E.C.’s blueprint for crypto is guided by a 1946 Supreme Court case involving investments in Florida orange groves. The case led to the creation of the Howey Test, a legal standard for determining what makes something a security if it isn’t a stock or bond.

Under the framework, a financial product becomes a security when it offers the chance to invest in a “common enterprise” with the expectation of profiting from other people’s efforts. Examples of securities under the Howey Test include some insurance products and even contracts for the sale of chinchillas.

A classification as a security comes with a wide range of legal requirements: Companies that offer securities must provide detailed disclosures and comply with complex investor-protection procedures that can be expensive to carry out.

In public remarks, Gary Gensler, the S.E.C. chair, has argued that most digital currencies qualify as securities under the Howey Test, because people invest in crypto hoping that the companies that issue the currencies will drive prices up. Only Bitcoin, he has said, is outside the S.E.C.’s reach, since no central group or individual oversees it.


Under the S.E.C.’s rule-making authority, Mr. Gensler had the option to develop new regulations for the crypto industry. But he has instead argued that the industry should be governed by existing laws and established court rulings to protect investors from fraud.

The crypto industry has called that approach overly broad, countering that there needs to be a formal contract between the seller of a digital coin and an investor for the arrangement to constitute a securities transaction.

“Gensler’s approach has been to put a square peg into a round hole,” said Teresa Goody Guillén, a partner with BakerHostetler and a former litigation counsel with the S.E.C. “There has to be a regulatory regime in place for these novel assets beyond just saying they are all securities.”

Mr. Gensler’s strategy faced an early test in the S.E.C.’s lawsuit against the digital currency issuer Ripple. In July, a federal judge in New York, Analisa Torres, ruled that Ripple’s cryptocurrency did not qualify as a security — at least when it was bought and sold on public exchanges by amateur investors. Judge Torres found that these investors did not expect to profit from Ripple’s actions as a business.

The ruling was celebrated in the crypto world. But the enthusiasm was tempered a few weeks later when a judge in another case endorsed the S.E.C.’s view that a different set of cryptocurrencies qualified as securities and rejected much of Judge Torres’s reasoning.

That split has raised the stakes for the judges overseeing the S.E.C. lawsuits against Coinbase and Binance, which serve as marketplaces for dozens of digital currencies. In those cases, the S.E.C. has argued that at least 20 cryptocurrencies qualified as securities, offering an opening for the judges to issue broad rulings that could apply across the universe of digital assets.

A hearing last week in the Coinbase case in federal court in Manhattan lasted five hours, with more than 500 people tuning in via phone; about 250 people tuned into the Binance hearing on Monday in Washington. Both hearings revolved around the applicability of the Howey Test to digital currencies.

Lawyers for Coinbase have argued that the S.E.C. is trying to stretch the intent of the Howey Test to cover crypto investments. Without a clear contractual agreement between the buyer of a digital coin and its issuer, the lawyers have said, a cryptocurrency is no different from any other “collectible” that might rise in value over time, like baseball cards or Beanie Babies dolls.

At the hearing, Judge Katherine Polk Failla appeared to endorse some of Coinbase’s concerns about S.E.C. overreach, saying the commission may be “sweeping too broadly.”

“We’re all just afraid that you have so little limitation on your standard” that some lawyers will argue that Beanie Babies are unregistered securities, she told a commission lawyer.

In the Binance case, Judge Amy Berman Jackson in Washington seemed more skeptical of the comparison between digital coins and collectible toys. But she expressed concern about the S.E.C.’s strategy and pressed the government lawyers to explain the boundaries of their argument.

Those hearings came a a few days after a major victory for the crypto industry, when the S.E.C. approved a new Bitcoin investment product for trading on Wall Street. Mr. Gensler had fought to block its introduction until a court ruled against the S.E.C. in August, effectively forcing the agency’s hand.

“That was an extraordinary thing that gave people cause for hope,” said Mr. Grewal of Coinbase. “There’s a real optimism in the industry now.”

Matthew Goldstein covers Wall Street and white-collar crime and housing issues. More about Matthew Goldstein

David Yaffe-Bellany writes about the crypto industry from San Francisco. He can be reached at More about David Yaffe-Bellany



As an enthusiast with demonstrable knowledge of the cryptocurrency space, I have closely followed the evolution of digital currencies, the regulatory landscape, and the ongoing legal battles that shape the industry. My insights are grounded in both theoretical understanding and real-world developments. I'll provide an analysis of the concepts mentioned in the article and their significance in the context of the current state of cryptocurrency regulation.

  1. Cryptocurrency Terms to Know: The article highlights the importance of understanding key cryptocurrency terms. Given the complexity of the crypto space, being well-versed in terms such as blockchain, decentralized finance (DeFi), smart contracts, and consensus algorithms is crucial. These terms represent the foundational elements of cryptocurrencies and contribute to a comprehensive understanding of the technology.

  2. Bitcoin E.T.F.s (Exchange-Traded Funds): The mention of Bitcoin E.T.F.s points to the growing intersection of traditional finance and the cryptocurrency market. An Exchange-Traded Fund for Bitcoin would allow investors to gain exposure to Bitcoin without directly owning the cryptocurrency. The article suggests that the regulatory stance on cryptocurrencies could influence the approval and regulation of such financial instruments.

  3. Crypto Businesses, Explained: Understanding the structure and operations of crypto businesses is key. From cryptocurrency exchanges like Coinbase and Binance to digital currency issuers like Ripple, these entities play a pivotal role in the crypto ecosystem. The article emphasizes that the legal classification of these businesses as securities or otherwise is a contentious issue with far-reaching implications.

  4. A Guide to Digital Currency: The guide to digital currency likely refers to the broader understanding of how digital currencies function, their use cases, and the challenges they face. This includes discussions on the decentralization ethos, the evolution of the industry from its inception in 2008 by Satoshi Nakamoto, and the shift from a communal project to a sector attracting traditional finance firms.

  5. U.S. Regulatory Landscape: The article delves into the regulatory challenges faced by the cryptocurrency industry in the United States. The Howey Test, originating from a 1946 Supreme Court decision, is a central element in the legal battles. The Securities and Exchange Commission (S.E.C.) argues that cryptocurrencies should be treated as securities, subject to strict regulations, while the industry contends that traditional Wall Street rules should not apply.

  6. Legal Battles and Industry Impact: The ongoing legal battles between the S.E.C. and major crypto firms, such as Coinbase and Binance, are described as an existential issue for the crypto industry. The outcomes of these cases could significantly shape the future of the industry in the U.S. and potentially set legal precedents that reverberate across the global crypto landscape.

  7. S.E.C. Chair Gary Gensler's Approach: The article touches on Gary Gensler's approach as the chair of the S.E.C., emphasizing his argument that existing laws and court rulings should govern the crypto industry. Gensler's viewpoint, framed within the Howey Test, raises questions about the regulatory framework and its adaptability to novel assets like cryptocurrencies.

  8. Recent Developments and Hearings: The article provides insights into recent developments, including hearings in the lawsuits against Coinbase and Binance. The judges' perspectives and potential preliminary rulings are expected to have significant implications for the industry. The nuanced discussions during these hearings, such as the applicability of the Howey Test to digital currencies, reflect the complexity of the legal arguments.

In summary, the article underscores the high-stakes nature of the current legal battles in the U.S., highlighting the clash between traditional regulatory frameworks and the decentralized ethos of cryptocurrencies. The outcome of these legal disputes is poised to shape the regulatory environment for the crypto industry, with potential consequences for its growth and integration into the broader financial system.

Is Cryptocurrency Like Stocks and Bonds? Courts Move Closer to an Answer. (2024)
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