I am interested to understand this term in general way as well as in the context of latest development in the crypto community with SEC starting a lawsuit against Binance saying its platforms traded 10 tokens that are securities.
What are securities in general and how is that applied to crypto currencies?
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Securities are metaphorical pieces of paper you can buy and sell that give you the rights to something else, like a share in a company gives you the right to take some of the company’s profits, or a derivative gives you the right to trade shares at a certain price.
Currencies *aren’t* legally considered securities, but the controversy exists because a lot of crypto “currencies” are just shares in disguise. Buying and holding BNB is effectively giving money to Binance and then getting back something similar to a share of Binance’s profits – which is what a share is. Except BNB isn’t *called* shares so none of the laws about shares apply to it. If you had Binance shares you could vote in the shareholder meetings to decide how much of Binance’s profit you should get; if you have BNB you couldn’t, so it’s like Binance is cheating.
The big cryptocurrencies are safely in the realm of currencies, but there’s a reason everyone and their dog has their own *little* cryptocurrency, and it’s precisely because you give them money but they don’t have to let you vote how they spend it. If the SEC decides those little currencies are actually securities they could be in a lot of legal trouble and have to pay back all the people who bought the currency.
The legal test for whether something is a security is whether there is:
1. **the investment of money** – for crypto, this is is pretty obvious, because people have to pay money for their crypto.
2. **in a common enterprise** – this is slightly tougher, but I think there’s a good case that unlike commodities like gold or oil there’s a common enterprise involved in setting the terms for the coins — how many there are, how they’re exchanged, etc.
3. **with a reasonable expectation of profits to be derived from the efforts of others –** this is the hardest part of the test for the SEC; does the value of crypto go up purely based on supply and demand (like gold or oil), or does it go up based significantly on whether people in an office building somewhere are doing a good job or a bad job (like a traditional company you would buy shares in on the stock market); this will likely vary significantly from one coin to another based on how much ongoing involvement the developers have. Because the terms of bitcoin where set at the beginning, I think there’s a good argument that it does not meet this. However, I think there are other coins that would.
In the case of Binance, they are basically just totally violating the law while saying that they are not. It’s the “stop hitting yourself” legal strategy, they are going to lose and it’s going to go down hard.
When people talk about “securities” they are normally talking about shares. This is when you are basically buying a peace of paper that says you are entitled to a fraction of a company. Securities are highly regulated, shareholders have rights, companies have oblations. There’s rules about the information that companies need to provide, LOTS of paperwork filings and so on before companies can sell shares to the public.
There’s a LOT of regulation, it can be very burdensome for companies but there’s good reasons that they exist. Binance has decided that it does not want to do any of this work, and they have decided that BNB is not a security and therefore it should not have to do all this work.
In reality, this is a “if it quacks like a duck” kind of situation. BNB is a security, just because Binance says it’s not does not mean it’s not. BNB has all the attributes and properties of a security and therefore all the securities regulation should apply. Binance has just decided they don’t want to.
So the government is getting involved to make them. If you’ve ever seen the Monty Python dead parrot sketch, that’s basically what’s happening here.
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