One of the most difficult things to explain to people who are unfamiliar with the cryptocurrency market is defining what exactly a cryptocurrency is in a financial context. Bitcoin, for example, is an instrument that can be used as cash, traded on exchanges, and could even be treated as a store of value, provided the volatility gets reigned in. However, it has fallen under the regulations of the Securities Exchange Commission which has regulations that help govern the market but they were not designed for bitcoin, ether, or any other cryptocurrency that is not really a true security.
Securities are seen as shares in a company that can be traded and can appreciate or depreciate in value based on the valuation of the company at large. Bitcoin, on the other hand, is not a share in a company, it is a stand-alone coin that derives its value from the cost it takes to mine and issue the coin as well as the value based on the demand for it.
Legally, the issue has been deciding how to proceed in regulating the cryptocurrency market when some people consider bitcoin and ether to be securities and believe they can be regulated effectively under those rules. But we have seen how desperately the cryptocurrency market needs a strong regulatory framework if it has any hope of becoming more mainstream and stable than it has been historically.
The director of the SEC’s Corporate Finance division, William Hinman, said of cryptocurrencies and the current issue of distinguishing them between assets and securities:
“Can a digital asset originally sold in a securities offering eventually be sold in something other than a security? How about cases when there’s no longer a company involved? I believe in those cases the answer is a qualified yes.”
Hopefully, this new distinction between cryptocurrencies being assets and not true securities will help bolster the regulatory development and give lawmakers a clearer image of what exactly they are trying to legislate. Unless they are able to make sense of the market and its functionality, any regulations coming out to support cryptocurrency may be rife with unintended negative consequences.