Cryptocurrencies are highly unpredictable investments that have the potential to fluctuate by double-digit percentages within hours, often leaving investors with catastrophic losses. Not backed by any central bank or government entity, their value rests solely with promises from developers and other parties – leaving them susceptible to fraud, manipulation and price swings that make cryptocurrency investments unsuitable for long-term investing. Furthermore, many cryptocurrency businesses that offer or exchange it aren’t registered with the Securities and Exchange Commission (SEC), so may not offer similar investor protections like those firms registered.
The Securities and Exchange Commission is trying to add clarity to the market by filing lawsuits against several exchanges and cryptocurrencies, such as Coinbase, Binance and Kraken. They contend that many digital assets they seek to regulate constitute securities that they seek sanctions for; their arguments have relied upon legal tests known as the Howey Test that define securities as investment contracts that promise their owners profits derived through promoter efforts or third party promotion; however this test has only been used selectively against exchanges and some cryptocurrencies by the SEC in their suits against exchanges or certain coins they seek.
IF a court rules that cryptocurrencies are securities, it would radically alter how they’re regulated. Securities law mandates greater disclosure from issuers and exchanges as well as additional safeguards against investor fraud – factors which might limit who can invest in these markets, potentially hampering growth.
On the other hand, should a court rule that most of these assets do not qualify as securities, this could open up even greater use and adoption across markets. Furthermore, regulatory red tape that hindered innovation or scaling might also be removed and scaled markets would have more freedom.
Answering this question will depend heavily on Congress and courts over the coming months. Legislation intended to regulate these markets has failed to gain momentum within a polarized Congress, with Democrats emphasizing investor protection while Republicans counterbalancing that with concerns over regulatory overreach.
While court battles continue between the SEC and crypto industry firms, these firms will maintain that the Howey Test does not apply to their tokens and that they should be exempt from securities regulation. Litigation against those being sued by the SEC has entered its discovery stages; depositions will need to be given and documents submitted – which will ultimately have enormous ramifications on how cryptocurrency world is governed in America; these lawsuits could determine who gets to police its new frontier.