Hash Notes

How does the SEC view cryptocurrency?

To determine whether a financial instrument will be considered an "investment contract" and therefore security, Howey Test is used:

3 questions the Howey test explores are:

1. Is there an investment of money with the expectation of future profits?

2. Is there investment of money in a common enterprise?

3. Do any profits come from the efforts of a promoter or third party?

In Dec 2020, SEC filed an action against Ripple Labs alleging they raised over $1.3 billion through an unregistered ongoing securities offering of its XRP digital currency.

Ripple's counter to SEC:

1. "Fair notice": affirmative defense. Claiming that SEC failed to provide clarity on whether to label XRP a security and argued that they were unfairly engaged in regulation by enforcement by targeting Ripple for unregistered sales.

2. Aiding-and-abetting claims (to help someone else do something illegal). The court held that, the SEC must plead and ultimately prove

• the existence of a securities law violation by the primary party;

• knowledge of this violation on the part of the aider and abettor;

• substantial assistance by the aider and abettor in the achievement of the primary violation.

3. Domestic versus foreign offers. Offers and sales of XRP were not domestic or alternatively were predominately foreign such that SEC's claims should be dismissed under Morrison v. National Australia bank.

What is CBDC?

A central bank digital currency is the digital form of a country's fiat currency. CBDC is issued and regulated by a nation's monetary authority or central bank. CBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy. As a centralized form of currency, they may not anonymize transactions as some cryptocurrencies do. Many countries are exploring how CBDCs will affect their economies, existing financial networks, and stability.

CBDCs vs. Cryptocurrencies

Cryptocurrencies are difficult to counterfeit and are secured by the implemented consensus mechanism on the blockchain they belong in. CBDCs, however, does not need to follow the the requirements of the blockchain technology. Additionally, cryptocurrencies are unregulated and decentralized. Its value fluctuate and is dictated by the coin transactions.

We know that stablecoin are collaterized with fiat currency. Individuals who transfer their fiat currency must put their trust in these companies and their stablecoins are properly backed. One positive or advantage that the CBDC has over stablecoins is that like the fiat currency, CBDC is completely backed by the government and controlled by a central bank, the disadvantage is the fact the this system will lead to centralization of the digital transactions.

Adoption of of Cryptocurrencies

While some traditional banks are proactive in how they address the mainstream adoption of cryptocurrency, the vast majority are only just waking up to the reality. For instance, banks like JPMorgan, Goldman Sachs, Revolut, and a couple of others have either adopted cryptocurrency as a mode of payment or have gone ahead to create their own digital coin for payment. The world is getting to the point where banks must open up to the emerging crypto industry otherwise they stand to face a lot of uncertainty in the ever-changing world of finance.