The recent warning from the securities regulator about scams involving ‘crypto asset securities’ has sparked a debate on the legal status of the term. Ripple’s Chief Legal Officer, Stuart Alderoty, argued that the term lacks a legal definition when the SEC used it in an FTX-related filing.
In the SEC’s enforcement actions with exchanges and crypto companies, the question of what truly qualifies as a “crypto asset security” under US law remains unanswered.
The SEC has not provided a clear definition of ‘crypto asset securities’. In a recent post, the US Securities and Exchange Commission (SEC) cautioned investors about crypto investment scams, using the term ‘crypto asset securities’. The agency referenced a blog from May 2024 that outlined ways scammers can defraud investors using ‘crypto asset securities’. Ripple’s Stuart Alderoty criticized the SEC for using the term without legal basis, calling it a “fabricated term.”
Alderoty pointed out the SEC’s use of the term in an FTX bankruptcy document, where the agency mentioned “crypto asset securities” held by the debtors. This has raised questions about the legal status of these assets under federal securities laws.
The term ‘crypto asset security’ lacks legal backing, as neither the SEC nor the Financial Industry Regulatory Authority (FINRA) have defined it. The SEC has used the Howey test, a legal standard from a 1946 court case, to determine whether certain investments qualify as securities. However, the application of this test has been debated, as seen in the Ripple lawsuit where the court ruled against the SEC.
In a recent legal battle with eToro, the SEC indicated that Bitcoin, Bitcoin Cash, and Ethereum are not securities. This ambiguity leaves room for interpretation on what can be classified as a ‘crypto asset security’.
Overall, the debate around ‘crypto asset securities’ highlights the need for a clear legal definition in the rapidly evolving cryptocurrency market. Investors and companies alike are seeking clarity on the regulatory framework surrounding these assets to prevent fraudulent activities and ensure compliance with securities laws.
