Crypto revolution gains momentum: Ripple is not a security and BlackRock's Bitcoin ETF
The ever-evolving crypto landscape has witnessed a flurry of developments that make for an exciting update. This market update details significant updates from June and July, highlighting the shifting regulatory landscape, key legal battles and the growing convergence between traditional finance and cryptocurrencies.
Securities and Exchange Commission’s (SEC) crackdown
Notable events unfolded in early June as the US-based Securities and Exchange Commission (SEC) took legal action against industry leaders Coinbase and Binance. These lawsuits alleged that Coinbase had been operating as an unregistered national securities exchange, while Binance was accused of providing misleading information to regulatory bodies regarding the scale of its operations. During this time, the SEC attempted to classify nearly 70 cryptocurrencies as securities. As a consequence, the combined market value of Coinbase and Binance experienced a staggering decline of approximately $5 billion since the start of June.
However, recent events are likely to have a positive impact on the entire US crypto industry.
Ripple’s (XRP) battle with the SEC
It is understandable that following the collapse of FTX, regulatory bodies have tried to crack down on illegal activity across the crypto landscape. However, a recent court win for Ripple (XRP) ruled against the SEC proving that the coin isn’t a security.
Back in 2012, Ripple Labs entered the crypto market, driven by the goal of revolutionising cross-border payments for financial institutions, promising swiftness and affordability. To facilitate this mission, they introduced a unique digital currency called XRP. However, in 2020, the SEC made a weighty accusation against Ripple, claiming that they had orchestrated an unregistered security offering in 2013 by raising more than $1.4 billion from investors.
Two years later, a ruling was made that Ripple did not violate federal securities law by selling its XRP token on public exchanges. This is a landmark victory for the crypto industry that saw the value of XRP spike by 75% shortly after the decision was made.
The partial victory for Ripple (XRP) will likely provide ammunition for other leading exchanges battling the SEC over whether their products fall under the regulator’s jurisdiction. With the ruling establishing that secondary sales of digital assets on exchanges does not qualify as unregistered securities offering, it sets a positive precedent and provides some clarity which a number of platforms have already acted on, with Coinbase, Kraken and Gemini all relisting the XRP.
What is a security?
According to the SEC a security is defined as any kind of tradable financial asset that has monetary value and can be bought or sold. This includes several financial instruments such as:
- Stocks: those that represent ownership in a corporation, entitling the holder to a share of the company's profits and assets.
- Bonds: that represent debt obligations issued by governments, municipalities, or corporations, entitling the holder to periodic interest payments and repayment of the principal amount.
- Mutual Funds: pooled investment funds that collect money from multiple investors to invest in diversified portfolios.
- Exchange-Traded Funds (ETFs): similar to mutual funds but traded on stock exchanges like individual stocks.
- Derivatives: financial contracts where value is derived from an underlying asset or benchmark.
- Notes and Debentures: debt instruments issued by corporations, typically with a fixed interest rate and maturity date.
- Certificates of Deposit (CDs): time deposits offered by banks with a fixed term and interest rate.
- Warrants: giving the holder the right to buy a company's stock at a fixed price for a specified period.
- Rights: providing existing shareholders with the privilege to purchase additional shares at a predetermined price within a specific time frame.
- Commercial Paper: short-term debt issued by corporations to raise funds for operational needs.
The SEC plays a vital role in regulating the issuance, trading, and disclosure of securities to protect investors and maintain fair and efficient markets. These definitions can change and develop overtime so it's always best to refer to the SEC for the latest information.
When is crypto not a security?
Whether a cryptocurrency is considered a security or not is a complex legal question that depends on several factors. However, some general principles can help to determine whether a particular cryptoasset is a security.
One important factor is whether the cryptoasset is offered or sold as an investment contract. An investment contract is a type of security that is defined as "an investment of money in a common enterprise with profits to come solely from the efforts of others." If a cryptoasset is offered or sold as an investment contract, then it is likely to be considered a security.
Another important factor is the level of decentralisation of the cryptoasset. If a cryptoasset is highly decentralised, meaning that it is not controlled by any single entity, then it is less likely to be considered a security. That's because decentralised cryptoassets are less likely to be used as investment contracts, as there is no central entity that is responsible for generating profits for investors.
Finally, the purpose of the cryptoasset can also be a factor in determining whether it is a security. If a cryptoasset is mainly used as a currency or a medium of exchange, then it is less likely to be considered a security. If it's primarily used as an investment vehicle, then it is more likely to be considered a security.
In general, cryptoassets that are more decentralised and that are not primarily used as investment vehicles are less likely to be considered securities. However, the specific legal status of any particular cryptoasset can only be determined on a case-by-case basis.
Here are some examples of cryptoassets that are not considered securities:
These cryptoassets are all highly decentralized and are not primarily used as investment vehicles. As a result, they are less likely to be considered securities. It is important to note that the legal status of cryptoassets can change over time. As the SEC continues to regulate the crypto industry, some cryptoassets listed above could be reclassified as securities.
BlackRock’s spot Bitcoin ETF application
The SEC has accepted BlackRock’s application for a spot Bitcoin exchange-traded fund (ETF). This acknowledgement marks a significant milestone in the convergence of traditional financial protocols and the world of cryptocurrency. While it’s worth noting that the spot ETF only offers indirect exposure to Bitcoin investing, the SEC’s acknowledgement signifies a change of sentiment for the regulator, who have, until now, been generally in opposition to spot Bitcoin ETFs.
What is a Spot ETF?
A spot ETF is an exchange-traded fund that tracks the spot price, or current price of purchase, of an underlying asset. In the case of cryptocurrencies, a spot ETF would track the current market price of Bitcoin, Ethereum, or another cryptocurrency.
Spot ETFs are different from futures ETFs, which track the future price of an asset. Futures ETFs are more commonly traded, but they can be more volatile than spot ETFs.
Spot ETFs are a relatively new investment vehicle, and there are only a few of them that track cryptocurrencies. However, as the cryptocurrency market grows, it is likely that more spot ETFs will be created.
What is different about BlackRock’s spot Bitcoin ETF?
BlackRock's spot Bitcoin ETF is different from other spot Bitcoin ETFs in a few key ways. First, it is the first to be accepted by the SEC. Second, it is backed by physical Bitcoin, rather than Bitcoin futures - meaning investors own actual Bitcoin through the ETF, rather than a derivative product. Third, BlackRock is a much larger and more established asset manager than some other companies that have filed for spot Bitcoin ETF approvals, which could give the BlackRock ETF more credibility and liquidity.
|BlackRock's spot Bitcoin ETF
|Other spot Bitcoin ETFs
Not yet approved
Smaller asset managers
Likely to be high
What does the Spot Bitcoin ETF mean for the industry?
The acceptance of BlackRock’s spot Bitcoin ETF application is a significant milestone for the cryptocurrency industry. It’s the first spot Bitcoin ETF approved by the SEC and will hopefully open up the Bitcoin market to a wider range of investors.
- Increased institutional investment: Making it easier for institutional investors to invest in Bitcoin. This could lead to a significant increase in the amount of capital flowing into the cryptocurrency market.
- Increased liquidity of the Bitcoin market: Meaning it is potentially easier for investors to buy and sell Bitcoin. However, this could lead to more volatility in the market.
- Increased legitimacy: This could lead to more businesses accepting Bitcoin as payment, and it could make it easier for people to use Bitcoin for everyday transactions.
Recent events illustrate the SEC’s efforts to assert its authority and reign in some of the industry’s most prominent players. These high-profile instances exemplify the SEC's resolute attempts to enforce compliance within the dynamic and ever-evolving crypto landscape.
However, BlackRock’s application lies as a testament to the readiness of traditional finance institutions to embrace and engage with the cryptocurrency landscape. The interest sparked by traditional finance heavyweights, such as BlackRock, is also set to captivate the attention of cautious investors, piquing their curiosity, and drawing them into the cryptocurrency ecosystem. If the application secures approval, the spot Bitcoin ETF, will offer an enticing gateway to the Bitcoin price. This integration into familiar risk and compliance frameworks ensures a level of comfort for risk-averse teams, facilitating smoother adoption and opening doors to new possibilities.