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29th August 2022 > > US legislation.


The Securities and Exchange Commission (SEC) is making up its own rules.

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Curious Cryptos’ Commentary – US legislation

Regular readers are familiar with the Lummis-Gillibrand bill (see CCC 8th, 9th, and 15th June 2022 amongst others) which will help to give greater clarity over the decision making process as to whether any specific crypto is a commodity or a security.

This question matters a great deal, as it determines which regulator takes primary responsibility, whether it is the Commodities and Futures Trading Commission (CFTC) or the Securities Exchange Commission (SEC).

All parties are agreed that BTC is a commodity, though note that applications for a spot BTC exchange traded fund (ETF) continue to be lodged with, and rejected by, the SEC.

Most parties also agree that ETH is a commodity. However, Gary Gensler, Chair of the SEC, has refused to publicly state his opinion on that issue, in contrast to previous Chairs of the SEC.

It is debatable as to whether going forward which classification, either as a security or a commodity, is the more beneficial for new alts. What is not in doubt, is that regulatory clarity on this point is a far superior alternative to the current situation, in which the industry is largely operating in a legislative void.

This lack of clarity is causing problems.

Grayscale, an investment firm, is most famous for its Grayscale Bitcoin Trust, an investment vehicle that is similar in nature to a spot ETF for BTC.

Grayscale also has several smaller trusts for other cryptos, notably ETH, but also another 23 alts including quite a few of the CCC’s investments, thus proving beyond a doubt the robustness of the Grayscale product offering.

However, in a recent filing from Grayscale, the firm has beefed up the notes about the risks of some of its alts being classified as securities, in response to recent questions and dialogue with the SEC.

Specifically, the alts affected by this change of guidance are XLM (Stellar Lumens), ZEC (Zcash), and ZEN (Horizen).

(For disclosure purposes, I invested in XLM a long time ago, and had a very small holding of ZEN and ZCash, both of which have since been sold).

This situation gets to the heart of the problem about regulatory uncertainty.

Grayscale has indicated that if the SEC gets its way, it will have to close the trusts that hold XLM, ZEC, and ZEN. Such uncertainty as to the viability of these trusts is intolerable for retail investors and is an insurmountable barrier for institutional involvement.

But the problem is potentially more extensive than just these three alts. Crypto lawyer Gabriel Shapiro, is worried by the SEC’s stance:

“ZEC (Zcash) had a pretty conservative token distribution strategy – no “premine”. If SEC thinks ZEC is a security, it indeed must think nearly every token is a security. Only immaculate-conception BTC would be (arguably) excluded”.

If this is a case of regulatory over-reach, then one hopes it is stopped before it becomes embedded and accepted by the lawmakers.

There are far-reaching implications, not least for XRP (Ripple) who have been long fighting the SEC over the latter’s claim that XRP is a security.

I am not getting bogged down in the details of that case (there is plenty of reading material out there) but I do have one question that has yet to be answered.

Those XRP aficionados who noisily inhabit social media, seem to rely upon their defence that XRP is not a security, by claiming that ETH should be classified as a security. At least that is my understanding, and I could be wrong.

As alluded to by Gabriel above, if ETH is a security, then every crypto bar BTC is also a security.

Why do XRP supporters want to prove that ETH is a security? I just don’t get it.

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