Is Crypto Regulated? 

If youre an investor like me, you want to know what investments are first of all, safe and second, are going to generate the biggest bang for your buck. We know that stocks can be relatively safe investments, as long as the company is doing well. But what about investing in cryptocurrencies? Are they safe? 

Lets wade through it... 

In the US, we have a regulatory body (SEC) that is in charge of ensuring citizens can invest safely. The SEC interests are to protect investors, which it does by regulating investment securities.  

The question for them is, are cryptocurrencies ... securities? To be classified as a security, it must pass the something called, the howey test. 

What is the howey test? 

In 1946, the U.S. Supreme Court issued a ruling in a case, SEC v Howey that established a precedent that would define the term “security”.

The Howey Company owned citrus groves in Florida. They offered parts of their land to people to invest in, but instead of the buyers farming the land themselves, the company would take care of the farming and share the profits. The buyers were essentially investing their money with the expectation of making a profit without having to do any of the work.

The Securities and Exchange Commission saw this and believed these investment deals should be regulated like other securities (such as stocks or bonds, which is a way for people to invest their money into a company, and profit from how well it runs its operations). 

The Howey Company disagreed, arguing they were just selling real estate, not securities.

The case went to the U.S. Supreme Court, which ruled in favor of the SEC. Now we have the Howey Test to determine whether something is a security.

A good example of a crypto company that argued against passing the Howey Test is Ripple Labs and its cryptocurrency XRP.

Ripple Labs

Ripple Labs was sued by the SEC in 2020. 

• The SEC claimed that Ripple’s sale of XRP tokens was an unregistered securities offering, meaning they believed XRP met the criteria under the Howey Test.

Ripple Labs argued against this. They claimed that XRP should not be considered a security for several reasons:

1. XRP holders don’t invest in Ripple – people buying XRP were not investing in Ripple as a company, unlike in Howey, where investors bought into a common enterprise.

2. XRP buyers have no expectation of profit based on Ripple’s work – the value of XRP didn’t depend on the efforts of Ripple itself but rather on the general market demand (like how Bitcoin or Ethereum operate).

3. XRP operates more like a currency – XRP functions as a digital currency, like Bitcoin, and should not be treated as an investment contract.

This legal battle is still ongoing, and the outcome will likely set precedents for how cryptocurrencies are classified for securities laws. 

The takeaway is that cryptocurrencies are pushing back on the SEC's interest in regulating them. Which means, they are currently unregulated and thus must be approached with caution. 

I invest in cryptocurrency which means I have accepted the risk and am careful about the technology I use to buy and sell. I generally avoid new coin offerings and only buy crypto thats been around for a while and use above board exchanges (coinbase).  Which also means that my investment info is reported to the IRS by coinbase & myself via capital dividends tax.