What the SEC’s Action Against Crypto Companies May Indicate to Investors

Exactly what is cryptocurrency? Why does the government want to restrict or perhaps even eliminate it? As an investor, should I avoid this asset class?

In this article, Financial Advisor Tom Saunders breaks down cryptocurrency, the SEC’s recent action against cryptocurrency companies, and what investors should know before investing in crypto.

 

What is cryptocurrency?

 

Before I delve into the details about cryptocurrency’s viability as a financial instrument, let’s first define what cryptocurrency is, and what it is not.

 

Though this may be a negative view of cryptocurrency, it is maybe the most accurate definition: cryptocurrency is a blip on a computer screen. Some like to think of cryptocurrency as a tangible form of currency, or money, but it is neither of these.

 

The definition of “Money”

 

Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country. Money serves three basic functions:

• It is a medium of exchange
• It serves as a unit of account
• It serves as a stable store of value

 

The definition of “Currency”

 

While money is intangible in nature and is expressed as a number, currency is a tangible form of money taking the form of bills, coins, or other physical medium of exchange.

 

Why cryptocurrency isn’t currency nor money

Cryptocurrency is neither currency nor money because:

 

• It is not tangible in nature therefore it’s not a currency
• It is not money as it fails to meet the definition of money:
  • There are approximately 260 forms of digital/cryptocurrency. None of these currencies can be used to directly purchase goods or services therefore they are not a medium of exchange
  • No entity or individual values their property based on a cryptocurrency; for instance, no one says “my house is worth 200 Bitcoin,” or relates the balance sheet of IBM in Dogecoin, therefore it is not a unit of account
  • With its volatile swings in value versus the US Dollar it would be hard to call cryptocurrencies a stable store of value

 

Cryptocurrency is not fiat currency

 

Fiat currencies are issued by various governments and backed by these government’s full faith and credit. Issuers of cryptocurrencies frequently claim cryptocurrencies are the equivalent of fiat currencies, however, not one cryptocurrency is backed by any promise to repay. A fiat currency’s value is based upon the government’s ability to stabilize its value by controlling its scarcity. Even the most destitute government will take some measure to prop-up their currency and avoid its collapse. No such entity stands behind any form of cryptocurrency.

 

How the U.S. Government and U.S. Securities and Exchange Commission (SEC) view cryptocurrency

 

So where does this leave us? Possibly in the same place as the U.S. Government and its effort to rein-in the use of cryptocurrencies. For the most part, the U.S. Government’s Securities and Exchange Commission (“SEC”) views cryptocurrencies as securities or perhaps even futures contracts that should be registered and disclosed as securities. The IRS believes holders should pay a capital gains tax based on the change in value from the time of purchase to sale.

 

Earlier in June 2023, the SEC took an enforcement action and sued two crypto companies that ostensibly acted as exchanges, Coinbase and Binance, claiming the two failed to register as securities exchanges. The SEC claims that each is required to register as an exchange, brokerage and clearing agency, yet they have not.

 

The government reasons that if they can force Coinbase and Binance to act as exchanges and treat cryptocurrencies as securities contracts like futures, they will limit cryptocurrencies’ utility, greatly diminish their usage, and codify their usage as an investment vehicle. However, Coinbase has some influential backers such as Vanguard, ARK Investment Management, Fidelity, BlackRock, Morgan Stanley and Goldman Sachs Group, who will try to protect their investment and support Coinbase with the SEC litigation.

 

What does the SEC’s action against Coinbase and Binance mean for the average investor?

 

So what does this mean to you? In its effort to rein in cryptocurrencies, the SEC issued a warning to all entities governed by the SEC – including all Register Investment Advisors and all publicly held banks and brokerages – to not transact with any client crypto assets held by these exchanges. To individual investors this means that in the near term it will be markedly more difficult to use cryptocurrencies and that the value of these currencies will probably decline in the near term.

 

In conclusion, this is not an asset class for the faint of heart and prudent investors may want to avoid crypto currencies until rules and regulations have been firmly established and adjudicated.

 

Disclosures:

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