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Home Blog cryptocurrency classification debates
Article by Yunis
26 March 2023 (Updated 23 May 2024)

Regulation of Cryptocurrencies: SEC Considers Securities Classification and Saudi Arabia Discusses Halal Status

There is a famous saying credited to Winston Churchill ''The Americans will always do the right thing… after they’ve exhausted all the alternatives.'' After witnessing a series of billion-dollar crypto enterprises went bankrupt, the hottest topic is finally the classification of cryptocurrencies.
Are cryptocurrencies securities? Is Bitcoin Halal?
  • Bitcoin domination is on rise.
  • Traditional finance is having a heart attack once again.
  • US SEC thinks cryptocurrencies are securities.
  • Islamic schoolars are divided whether Bitcoin and cryptocurrencies are Halal or not.

Bitcoin had a glorious comeback in the last two months but the alts are not following after the king. Because there is a distinct difference between Bitcoin and other cryptocurrencies by their nature. Banks are crashing in US and Europe, traditional finance is under a systemic risk. Bitcoin is a promising substitution for traditional fiat currencies. Bitcoin is created in a form of money as it serves as a peer-to-peer payment system, but the alts are designed to be a form of payment within their network only. You use Ether, Matic, and Avax only when you want to use their networks. Altcoins are payment methods in their own network only. Here step up Bitcoin Maxis.

There was no pre-sale of Bitcoin, but almost all other cryptocurrencies started with a public sale under different methods. Other currencies were marketed and sold with a promise of success of the network. We still don’t know which network will be still alive 10-15 years from now. But if the network, exchange, game, storage or any project with a token you invested in will survive, you will definitely make a good profit.

Gary Gensler, the chairman of the SEC, has said that everything else other than Bitcoin is security according to US laws. Because people invest in cryptocurrencies to receive a profit depending on the enterprise’s success. By doing this, there is an expectation of making a profit from other people’s efforts. In this article, we will go thru the case and learn what securities are, why cryptocurrencies can be considered securities, and why it is important.

By the way, we are talking about the classification of cryptocurrencies, we should take a look at other concerns about their status. For example, Saudi Arabia is a state, ruled under the Islamic law Sharia. So it is important to classify which assets are Halal, and which assets are Haram to trade. For example, an investor can not invest in an alcoholic beverage company’s stock, it is haram but if the company is selling only orange juices, then it is halal. So the question is; Is Bitcoin Halal? Are cryptocurrencies Halal?

What are securities? 

Securities are tradable financial assets. There is no clear definition of securities but we have a binding prejudication precedent from the case of Howey in 1946. After the decision of the Howey case, there is a four-prong Howey test to state if an asset can be classified as a security.

  1. There is an investment of money.
  2. The investment is made into a "common enterprise."
  3. The investors expect to make a profit from their investment.
  4. Any expected profits or returns are due to the actions of a third party or promoter.

Why can cryptocurrencies be considered securities? 

There are many similarities between securities and cryptocurrencies because of their natures. Cryptocurrencies are the most similar to cryptocurrencies among the securities and the similarities are listed below;

  • They can be issued like stocks.
  • They go public with ICOs like stock IPOs.
  • Money is invested in.
  • Expectation to make a profit.
  • Other’s efforts generate profit.

When you hold a Howey test on cryptocurrencies and you check the items above, it is easy to say that they can be classified as securities. I want to give examples with well-known tokens, let's say, Uni, Sushi, Rose, Cake etc. When you hold those tokens, you can participate in the platform’s governance. It is like attending shareholders' meetings when you hold a company’s stocks. The platforms are expected to generate revenue by collecting trading fees and sharing the revenue with token holders. It is like companies sharing dividends.

Why is it important?

Securities are regulated financial assets. The Securities and Exchange Commission (SEC) in the US is responsible for regulations and monitoring securities. Even though some crypto exchanges attempt to create a better-regulated environment for investors, it is still a grey area and there is confusion about the status of cryptocurrencies and exchanges. If SEC starts regulations on cryptocurrencies, exchanges will be required to implement regulations. Then crypto exchanges will need special licences to trade and to provide trading services. They will be required to show a certain level of reserves and funds to operate.

Efforts to regulate cryptocurrencies are for investors' protection. Crypto markets are highly volatile, fragile, and open to manipulations. Funds in traditional banks are protected by the government. If you read our blog article about deposit insurance, you can learn more about FDIC, EDIS, FSCS and their deposit protection policies.

Regulated crypto markets will be much safer but it comes with a systemic problem in a decentralized world. Cryptocurrencies are assets that represent decentralized enterprises. Centralized control over decentralized assets will be a dilemma which will require long debates and discussions.

Is Bitcoin Halal?

As we put Bitcoin in a different category in terms of securities classification, we can do the same about deciding whether a cryptocurrency is halal or not. Islamic experts and scholars are divided on this subject. It is a grey area in the Sheria because it is very modern technology. Before asking if Bitcoin is Halal or haram, we should ask if Bitcoin is a currency. Bitcoin is designed and used as a digital currency, but acceptance is limited and there are still doubts about its place. The more common acceptance of Bitcoin will increase, the easier it will be to answer the question. Bitcoin as a currency is halal.

The main reason why some people think that the Bitcoin and cryptocurrencies are haram is high volatility causes risk and losses and resembles gambling. This reason is not something the market can not overcome. Crypto prices are expected to settle down and will be priced in a reasonable range. It is still too early to classify cryptocurrencies in terms of halal or haram.

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