Blockchain Semantics Insights
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SEC Doesn't Consider Bitcoin and Ethereum as SecuritiesBy Anurag Srivastava | June 15, 2018, 2:53 p.m. GMT
Death and taxes are permanent. Most crypto traders in bull cycles feel immortal enough to not worry about one of those two. Hint: Tax is a near-constant pain-in-the-backside.
Here’s one less reason to worry about taxes for crypto traders. Bitcoin and ether will not be regulated or taxed like securities in the US, SEC declared yesterday.
The definition of securities varies from jurisdiction to jurisdiction. Typically, securities are used as means to raise funds. It is issued by companies and governments. Governments raise fund by issuing debt securities. Companies raise fund by the means of equity stocks. Other popular securities are bonds, futures, options, banknotes among others. There is no physical asset attached to it. It can either be issued via digital certificates or via a mere book entry. You may ask who would buy it. Securities are bought by wholesale and retail investors. Retail investors are individuals. Wholesale investors are registered companies. Wholesale investors can invest on behalf of individuals. They can invest in their individual capacity as well.
You would have noticed that I used the term “investor” for the buyers of securities. The reason is simple. Buyers of securities expect its value to go up as a result of efforts put in by the issuer's institution. Be it a company. Be it a government. This is an important aspect. The government will tax you for making a securities transaction.
Securities and Crypto Tokens
The crypto community has faced the heat of government bodies across the world. One thorn in their sole was the US SEC indicating that they would put crypto tokens under the bucket of securities. This meant that all the crypto trading would be taxed. This was not taken very well by the crypto community. Tokens tanked.
Let's revisit crypto tokens. Tokens are the lifeblood of Blockchain networks. It powers the network. Tokens are traded heavily by retail and wholesale investors on crypto exchanges. There are close to 300 Blockchain networks that are listed on crypto exchanges globally. Each network has its own currency or token. So, more the network grows, the price of the token goes up. A lot like a company's stock price.
Now, if you look at tokens and securities, you will find a lot of similarities. US SEC doesn't sound too stupid now, right for saying tokens should be taxed like securities? But now they have come out with a more nuanced stance. The body has kept Ether (a token that fires Ethereum network) and Bitcoin (a token that fires Bitcoin Blockchain) aside from the rest and declared them as not being securities. Other cryptos, at least for now, have been put under the bucket of securities. It is a big win for the Blockchain community and the jump in the price of Ether since reflects the euphoria.
You may ask what's so special with Ethereum and Bitcoin. These are the only two Blockchain networks which are truly decentralized in nature. There isn't a single organization running it. It is updated, built, maintained, and run by thousands of individuals (nodes in terms of Blockchain). To be precise, 17,000 nodes (as of 15th June 2018) power Ethereum and 10,000 nodes (as of 15th June 2018) power Bitcoin. On top of this, none of the nodes hold a substantially large amount of either Ether or Bitcoin making it decentralized in a true sense.
If you look at any other Blockchain network, there is a company or a clan associated with it. A number of nodes are quite minimal and incestuous too. The founding entity holds remarkably large percentage of their Blockchain network's token. These things only ensure that the price of the token would solely be determined by the efforts of the founding company or team. This leaves no doubt that tokens of such Blockchain networks should be treated as securities.
Several crypto teams have cried foul over this decision that supposedly ‘favors’ Bitcoin and Ethereum. Many liken their Blockchain to Ethereum, especially all the ones that dub themselves Ethereum-killers. Their argument is that even if they are not so decentralised right now, they are on the same path as Ethereum- even Ethereum was not so decentralised a few years ago, was it? This argument holds little water for me. What do you call a caterpillar? Not a butterfly right. Similarly, what do you call eOS, Tron, NEO, XEM, Waves? Not an Ethereum. Once a caterpillar has painstakingly metamorphosed into a pupa and then a butterfly, well no one begrudges calling it a butterfly. Similarly, once these guys have attained the decentralization nirvana, they can probably stop being a security too.
I strongly believe that it is a smart and learned move by US SEC. It is a pleasant surprise that they were actually able to distinguish between the nature of multiple Blockchain networks. It is a pleasant surprise that they understand the concept of decentralization so clearly. This move has removed the clutter in the Blockchain networks. I have maintained it for long now that if your “Blockchain” network is not decentralized, it is not a Blockchain network. Be it a private Blockchain. Be it a public Blockchain network with few nodes.
Hail SEC! Hail Ethereum! Hail Bitcoin!