Over the past few weeks, there have been numerous reports of senior U.S. officials calling for regulation and the classification of cryptocurrencies as securities. Despite all of this news seeming to be entirely negative, it's unlikely the US will ban encryption entirely.
The United States is known for having strict laws and regulations to protect investors. For the past 13 years, cryptocurrencies have operated outside of these guidelines and can be bought, sold or exchanged by anyone without any regulatory issues. Unfortunately, that appears to be changing as top U.S. financial officials including SEC Chairman Gary Gensler, Senator Elizabeth Warren and Congressman Brad Sherman have been calling for regulation of the cryptocurrency space .
Regulators have been focusing on a few specific areas in their first push to regulate the cryptocurrency space. The focus is on the management of unregistered securities that are freely traded on the cryptocurrency market. According to the U.S. definition, a security is an asset that "invests funds in a common enterprise with the reasonable expectation of profiting from the efforts of others." If an asset meets these four criteria, the government classifies it as a security, meaning it can only be traded on registered exchanges such as Nasdaq and the New York Stock Exchange, and anyone who holds the asset can Must pass strict KYC/AML procedures before exchange.
It is conceivable that any cryptocurrencies declared as securities could be destroyed and forgotten as they would be delisted from all major cryptocurrency exchanges. Currently, XRP, once the third-largest cryptocurrency by market capitalization, is filing a lawsuit with the U.S. Securities and Exchange Commission (SEC), which believes that XRP is an unregistered security that needs to be regulated. Fortunately, XRP won the lawsuit and it looks like they will settle with the SEC and not face any significant damages. This will set a strong precedent for all other cryptocurrencies, and the SEC will have to ensure they now only track cryptocurrencies that are definitely securities.
The vast majority of cryptocurrencies are likely not securities. In fact, Bitcoin and Ethereum have been officially declared non-securities. They are considered property for tax purposes along with most other cryptocurrencies. Hopefully, the SEC will provide greater regulatory clarity to cryptocurrencies, making them more suitable for purchase. Whenever someone buys something with bitcoin, they have to report the transaction as a taxable event, a hassle that cash doesn't have. If the SEC creates a new asset class called "digital currency," investors can not only speculate on bitcoin, but also use it as its intended digital cash.
One class of cryptocurrencies that may be declared securities are exchange tokens, such as Binance's BNB and FTX's FTT. The value of these tokens is heavily dependent on their parent company, so they can be said to be securities that derive value from the success of the parent company. For example, Binance uses a portion of its quarterly profits for the buyback of BNB tokens and creates a use case for BNB by offering users discounts on fees when they use BNB to transact on the platform. “What is Binance Coin good for without Binance?” This is the question regulators will be asking and will influence their decisions on whether BNB and other exchange tokens are securities.
Another area targeted by regulators is stablecoins, especially those that are not fully backed by the U.S. dollar. Banks lobbying heavily in Congress have been calling for stablecoins to be regulated. This may be because stablecoins and DeFi have the potential to replace banks, and Congress is listening to their pleas. They specifically target Tether, which has come under scrutiny in the past for lacking true 1:1 support for USDT. They only hold enough funds to back 77% of the USDT in circulation, which means it is not really a dollar-pegged coin.
Regulators are likely to demand that stablecoin issuers be more transparent and fully support their stablecoins. Stablecoins risk being banned entirely or declared as securities. At best, fully backed stablecoins will be declared as money, which will reduce taxable events when they are exchanged for other cryptocurrencies or used in DeFi.
The future of decentralized stablecoins like DAI is even more uncertain as there are no companies to sue or servers to shut down. Even if they are overcollateralized by a basket of cryptocurrencies, the SEC may not think that is enough. However, they cannot stop the circulation of DAI because it is completely decentralized and not controlled by any entity. Stopping DAI is as difficult as stopping the entire Ethereum blockchain.
Tokenized shares will most likely be regulated by the SEC. These tokens are assets pegged to stock prices, usually through the use of decentralized oracles like Chainlink. They offer many benefits over traditional stocks such as being available to anyone anywhere in the world, not just US citizens with bank accounts.
Binance has offered tokenized shares on its platform in the past, but recently removed it to avoid regulatory scrutiny. The Mirror Protocol, on the other hand, is a decentralized platform that allows for the issuance of tokenized shares, similar to how Maker issues DAI as a stablecoin. Even if Mirror is issuing unregistered securities, like DAI, it's impossible to stop without shutting down the entire decentralized and immutable blockchain, so no regulation is likely to help.
While upcoming cryptocurrency regulation could be devastating to a handful of projects, the majority of the market will remain unaffected. If regulation is looser than investors expect, some projects may even see valuations increase, as regulation will be a small hurdle in the way of project success. Cryptocurrencies have survived multiple bear markets and crashes for 13 years, so some overdue regulation won't devastate the $1.6 trillion market.
(This article is approved to be reproduced from Bitpush, and the Chinese is compiled by Bai Ze Research Institute. Please contact the editor for Chinese reprint)
