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Trinidad and Tobago Securities and Exchange Commission
Globally, as of November 7, 2020, there were over 6,700 types of cryptocurrencies including Bitcoin, the most popular digital currency, which was trading at $ 15,014.90 USD last week. This equates to approximately TTD $ 101,964.75. At the start of the fourth quarter of 2020, cryptocurrencies had a cumulative market capitalization of $ 237.1 billion. Despite this, there are many concerns surrounding the use of cryptocurrency, including the substantial fluctuation in the market price, regulatory and legal oversight, and of course the looming question as to whether it is a stock.
In previous articles, the Trinidad and Tobago Securities and Exchange Commission (TTSEC) has discussed the importance of financial technology (Fintech) and the potential of Fintech products and services in the securities market. The TTSEC also discussed the topic of titles and its characteristics. This week’s article will discuss the topic of cryptocurrencies and whether they can be considered stocks.
What is cryptocurrency?
Cryptocurrencies are digital financial assets that can be encrypted or purchased through an online exchange or through Initial Coin Offerings (ICO). These digital currencies use cryptographic technology to provide a secure electronic transaction. This is achieved by using a decentralized system of blockchain encryption technology to control the amount of currency issued and to record ownership and payments. It should be noted that cryptocurrency is digital and not regarded as legal tender such as coins or banknotes, as it does not have all the attributes of real currency. Additionally, cryptocurrencies must be stored on a digital wallet and cannot be physically withdrawn to be used as a form of payment for the exchange of an item or service. However, it is possible to make transfers via digital wallets for payments and receipts.
Is cryptocurrency a security?
For many, the cryptocurrency market gives the impression of profitable security worth investing. An abundance of advertising is spread through popular social networking sites, highlighting the large gains from investing in these “crypto assets”; but are cryptocurrencies securities? Will you get profitable returns once you buy? The answer depends on various factors. In the United States, the precedent resides in a particular Supreme Court case – SEC v WJ Howey Co, 328 US 293 (1946) or more popularly known as the “Howey Test”. This test is used globally to determine if a product is a stock.
The Howey test states that a financial instrument, such as a crypto asset, will be considered an “investment contract” and therefore a “security”, where there is an investment:
1. Money (which could include, for example, an investment in fiat or cryptocurrency).
2. In a joint venture.
3. With an expectation of profit arising from the managerial or entrepreneurial efforts of others.
Overall, if a person invests their money in a joint venture and is induced to expect profits solely from the efforts of others, this can be considered a stock.
In June 2019, Securities and Exchange Commission (US SEC) Chairman Jay Clayton further clarified that Bitcoin is not a stock. Clayton said that “cryptocurrencies replace sovereign currencies … (they) replace yen, dollar, euro with Bitcoin. That type of currency is no guarantee.”
When considering what a stock is, Initial Coin Offerings (ICOs) seem to fit the definition of a stock a little clearer than cryptocurrencies. According to the International Organization of Securities Commissions (IOSCO), ICOs, (also known as token sales or coin sales), typically involve the creation of digital tokens, using distributed ledger technology, and their sale to investors via auction. or subscription, in exchange for a cryptocurrency “.
In August 2020, the US SEC made a rather powerful move that could chart the path for cryptocurrencies to become a stock in the future. The president said the US SEC is working with other financial regulators to determine who has regulatory jurisdiction over different crypto products. He went on to say, “If you’re talking about … the tokenization of ETFs (exchange-traded funds) … We should lead it, and we are willing to lead it.”
Within our region, individual countries are making great strides in the cryptocurrency market. The Jamaica Stock Exchange is currently working on the regulatory framework to facilitate crypto-asset trading and Barbados-based company BITT has launched its payment system that uses blockchain and distributed ledger technology.
Are cryptocurrencies a recognized title in T&T?
Similar to our regional and international counterparts, TTSEC has taken a strategic approach to dealing with cryptocurrencies within our market. All cryptocurrencies from Trinidad and Tobago will need to be reviewed on a case-by-case basis to determine if it is a stock or otherwise. This will determine who the appropriate regulator should be.
TTSEC, along with other financial regulators, is looking to implement various regulatory tools such as Innovation Hub and Regulatory Sandbox to aid in the regulation of Fintech products and services. Fintech products such as cryptocurrencies are constantly evolving and can be similar or different to popular cryptocurrencies on the market. Therefore, the aforementioned regulatory tools will help regulators understand products and determine regulatory requirements. To date, no cryptocurrency has been registered with the TTSEC.
Should you invest in cryptocurrencies?
Most online cryptocurrency exchanges are unregulated. In an unregulated environment, there is significantly less investor protection than traditional securities markets and considerably more opportunities for fraud and manipulation. As such, it is important to understand the risks before investing. You need to ask the following questions:
1. Is the initial coin offering registered with TTSEC? As stated above, there are no cryptocurrencies registered in Trinidad and Tobago.
2. Does the opportunity seem too good to be true or are you forced to act quickly?
3. If a blockchain is used, is the blockchain open and public?
4. Who issues, sponsors, promotes or markets the product?
5. What specific rights are provided with my investment?
6. Does the company have financial statements? If so, are they checked and by whom?
7. Is there any trading data? If so, is there any way to verify it?
8. If it is a digital wallet, what happens if I lose the key? Will I still have access to my investment?
Learn more about Fintechs by taking the Fintech Digital Pledge at https://investucatett.com/caribbean-fintech-pledge-initiative/.
For more information on Fintech and the securities industry, visit www.ttsec.org.tt or www.investucatett.com or follow us on Facebook; Twitter; Instagram and YouTube.
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