Are cryptocurrencies deemed an unregistered security? Are some cryptos treated differently from others? What is an unregistered security, anyway? These are questions swirling around in the crypto world — and even confounding some legal experts.

Robinhood
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announced last week that it is removing three crypto tokens from its platform. That’s the latest ripple effect of actions taken by the U.S. Securities and Exchange Commission (SEC), including charges filed against major crypto exchanges Binance and Coinbase
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related to the sale of unregistered securities.

Sound familiar? Unregistered securities are the new buzzword ever since Taylor Swift famously avoided being embroiled in a scandal related to the collapse of FTX in November. The singer-songwriter asked one question when the company approached her to promote its tokens for a reported $100 million: “Can you tell me that these are not unregistered securities?” 

It was a smart question, and a timely one — given the rise of crypto in recent years. Anyone who promotes unregistered securities can be held liable, according to the SEC.

So what are unregistered securities — and how do they relate to crypto? And are all cryptocurrencies unregistered securities? 

Registered vs. unregistered

The question about unregistered securities is really a two-part issue: What is deemed to be securities? When are they not registered? 

For the registration part, federal law requires securities available for sale to be publicly registered with the SEC and to meet certain disclosure requirements, unless there has been an exemption granted. It’s essentially an act to protect investors, legal experts said, so that investors can better understand what they are buying. The registration is also designed to crack down on fraudulent activities, including deceit and misrepresentation.

If not registered, it means investors can lose layers of protection, including not being able to identify a clear money trail or to track when an investment has failed, said Tyler Rutherford, associate attorney focused on crypto and securities at law firm Pastore in Stamford, Conn.

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“It makes it a lot more difficult for them to try to hold that actor accountable and recoup their losses,” Rutherford said. 

The SEC warned investors in March that no crypto asset entity had been registered with the regulator as a national securities exchange. In addition, none of the existing national securities exchanges, such as the New York Stock Exchange or the Nasdaq Stock Market, were trading crypto, meaning investors could be vulnerable to front-running, manipulation and other types of misconduct. 

That doesn’t mean crypto companies haven’t expressed an interest in the registration process. Coinbase has argued the problem has been that the SEC wasn’t allowing it to register, citing a lack of regulatory guidance. 

“We met with the SEC more than 30 times over nine months, but we were doing all of the talking,” the crypto exchange wrote in a blog post in March. 

“There’s ambiguity around the process,” Rutherford said. “There are no clear steps on how these exchanges or these cryptocurrencies are supposed to register [and] how exactly they are supposed to comply.”

While SEC Chairman Gary Gensler maintains that regulations around securities registration are clear, Rutherford added, “I think they are neglecting the fact that it truly isn’t black and white.” 

Securities vs. Commodities

On top of that, cryptocurrencies are sometimes considered a commodity, rather than securities, and that’s the tricky part, legal experts say. 

Securities refer to financial investments in a common or shared enterprise that also earn profits for the investor, according to the 1946 Howey Test. They are registered with the SEC, while commodities are regulated by the Commodity Futures Trading Commission. 

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A commodity is a product that can be commonly traded. Some common commodities include copper, crude oil, cotton and corn. Even defining cryptocurrency as a commodity does not protect it from regulation probes or regulatory vagueness. The CFTC has also alleged the biggest two crypto exchanges for violating commodity trading laws.

Are all crypto unregistered securities? Not necessarily, said Mark Cianci, litigation and enforcement counsel at global law firm Ropes & Gray. In the case of crypto, two of the biggest cryptocurrencies, bitcoin
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and ethereum
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are traded via the CFTC as commodities. 

“Virtually everyone agrees that bitcoin, the largest cryptocurrency by market capitalization by a wide margin, is not a security — though the SEC has not in any formal way adopted this position,” Cianci told MarketWatch in an email. And that applies to Ether as well, he added, although certain regulators have begun to challenge this view. 

But even so, out of the several thousand cryptocurrencies in the market, regulators have “specifically challenged only a small fraction of them as alleged unregistered securities, and courts have classified an even smaller fraction of them as such,” Cianci added.  

The SEC’s position so far has been that the majority of cryptocurrencies are securities, Rutherford said, but this might be the realm that gets tricky, because of the lack of regulation and legislation. “It’s kind of left up in the air,” he said. 

For background: Why crypto regulation is messy, even with the fall of FTX


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