To answer this, we must dive into the world of crypto-regulation and unravel some complex legalities. Let’s start with understanding why it matters.
I own a few of the altcoins that the SEC has labeled as securities, such as XRP, MANA, SAND, ALGO, BTT, DASH, and others, as I’m sure many HODLers do. I do not foresee selling any at this time.
IMO, these altcoins could recover a lot of their lost value over time, and particularly during th enext bull run. If selling creates a loss, you might want to wait.
The SEC announcement and the decision of a couple of exchanges to delist these altcoins have created fear, uncertainty, and doubt (FUD) across the crypto universe. But is it warranted?
Why It Matters & What to Do About It
When an altcoin is classified as a security by the SEC, it means that the altcoin must comply with specific regulations and requirements, which can impact its liquidity and market accessibility.
As a crypto investor, it’s important for me to keep track of such developments to stay compliant and understand how these might affect my investment’s potential.
When you look at what happened after the SEC opened its lawsuit against Ripple Labs’ XRP altcoin, several exchanges delisted XRP. That means you couldn’t buy or sell it on that exchange.
You could still move it off the exchange to sell elsewhere. IMO, it is not wise to leave your crypto on an exchange anyway. There is too much chance of a hack or bankruptcy of the exchange.
Look at FTX. Many American investors thought it was too big to fail. Oops.
However, if you remember November 2021, e-Toro announced it would delist Cardano (ADA) and Tron (TRX) by 2022 due to “regulatory concerns.”
I sold my ADA and TRX holdings immediately. It was the first such “scare” for me. Since then, several FUD incidents have occurred, including the SEC lawsuit against Ripple’s XRP. I still hold XRP in my cold wallet. Maybe I’ve gotten used to the SEC’s FUD and “scare tactics” and am not so apt to panic.
Knowledge is the key. Knowing and accepting the risks can help you make a more informed decision.
What Is the Howey Test?
To determine whether an asset qualifies as a security, the SEC often relies on the Howey Test, derived from a 1946 U.S. Supreme Court case, SEC v. W.J. Howey Co.
It involves assessing whether there’s an investment of money in a common enterprise, with an expectation of profit predominantly from the efforts of others.
“Under the Howey Test, a transaction qualifies as a security if it involves the following four elements:
1. An investment of money
2. In a common enterprise
3. A reasonable expectation of profit
4. Derived from the efforts of others
To be considered a security, a transaction must meet all four prongs of the Howey Test.” — Embroker.
Given their Initial Coin Offering (ICO) structures and reliance on specific teams for success, many altcoins can fall under this definition.
However, in 2021, one of the altcoins determined by the SEC to be a securities, received permission from the SEC to hold an ICO. Now, the SEC is saying they have been selling securities illegally since 2019. WTF?
Are These Cryptos Securities!? SEC vs. Binance Breakdown!!
What Happens When an Altcoin Is a Security
Many investors wonder why the executive officers for these altcoins don’t simply register their coins with the SEC and be done with it.
Unless there is an exemption, if an altcoin is classified as a security, it must be registered with the SEC. This is a difficult, time-consuming, complicated, and costly process. These requirements also apply to the dealers, brokers, and exchanges that trade the altcoins.
It brings in a host of requirements, including regular periodic disclosures and updates about the business and compliance with broker/dealer rules.
Any misstep or noncompliance with SEC regulations could lead to sanctions, fines, and penalties.
On the one hand, this can limit the coin’s trading options, but on the other, it can offer some protection for investors like us.
Additionally, registration with the SEC often gives an aura of legitimacy to the altcoin. With the number of scam coins and rug pulls in the cryptocurrency market, this is a good thing for investors.
Plus, after being deemed a security or registering as a security, if the altcoin’s administrators fail to meet all the requirements, they leave themselves open to class-action lawsuits by investors.
However, the SEC could have given much clearer guidance to prevent the goat screw surrounding these altcoins, severely damaging investors more than the exchanges, brokers, and dealers.
Which Crypto Are Not Securities
According to the SEC, Bitcoin and Ethereum are not considered securities, largely due to their decentralized nature.
Unlike most altcoins, they don’t rely on a single entity or group for their success, which means they fail the “efforts of others” part of the Howey Test. Therefore, they fall under different regulations than many altcoins.
Are the SEC-Identified Altcoins Still Good Investments?
Despite the regulatory complications, I believe that altcoins identified as securities can still be good investments.
Though, I would be hesitant to buy any of these since there are better choices with fewer problems even with the reduced price brought about by the FUD created by the SEC.
Although they come with different rules and potential risks, they also have unique potential benefits. Their SEC registration can boost investor confidence, and the mandated transparency can provide clearer insights into the project’s progress and financials.
Plus, like Ripple and XRP, it will likely take years to iron this all out, particularly if there are more lawsuits.
If you’re like me and own altcoins that the SEC has classified as securities, it’s crucial to understand what it implies and how it can affect your investment strategy.
However, if you decide to sell now, you risk the chance these altcoins will recover during the next bull run and could, at the minimum, get your money back.
You can possibly write off some of the losses on your taxes, but ask a tax professional about that because the rules change constantly.
“A White House official confirmed the budget will include a tax provision intended to reduce wash sales trading by crypto investors. At present, investors can sell any cryptocurrencies at a loss, claim the loss on their taxes and then buy the same amount and type of cryptocurrencies again.” — Coin Desk, 9 MAR 23.
Always stay informed, comply with the regulations, and adapt your strategy as needed. Happy investing!
As I stated above, move your cryptocurrency to a more secure environment you control with a cold wallet.
No exchange is immune to hacks or insolvency.
“Chainalysis identified $3.8 billion in cryptocurrency hacks last year, which is 15% up in 2021 ($3.3 billion) and dramatically up on the $0.5 billion stolen in 2020.”
