Bitcoin as a commodity: Will alternative coins be classified as securities in the US?

A new wind is blowing through the crypto world, as discussions are underway in the U.S. about whether Alternative Coins (Altcoins) should be classified as securities. This potential change raises questions:

• What does this mean for fun cryptocurrencies like Dogecoin and Shiba Inu? What about established giants like Bitcoin and Ethereum?
• Will altcoins maintain their place in the market or will the innovation lead to an increased focus on Bitcoin?
• What are the tax implications as a result?

We take a look at the requirements for this classification, the Howey test, and shed light on potential implications for companies, investors and the crypto industry as a whole. The future of cryptocurrencies may be on the verge of significant change.

Alternative coins to be classified as securities in the U.S.?

Does this mean the end for fun coins like Doge, Shiba Inu or the Spongebogcoins? And what about the blue chips BTC or ETH or even Ethereum? What are the tax consequences of this?

While in Germany cryptocurrencies are at best only regarded as securities in a few cases, the US Securities and Exchange Commission has taken a clearer stance. Quite obviously, the vast majority of cryptocurrencies are to be treated as securities there. This would have significant consequences for the market, as the associated regulations are very restrictive.   

The U.S. Securities and Exchange Commission comments on the legal classification of cryptocurrencies

Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), confirmed in numerous interviews and speeches his view – and that of his agency – that Bitcoin should be considered a “commodity,” while most other crypto assets should be securities. This viewpoint underscores the complex and multifaceted challenges of regulating digital assets.

Requirements for considering altcoins as securities

“Altcoins” (Alternative Coins) are all cryptocurrencies except Bitcoin. The classification of altcoins as securities depends on their specific characteristics and the way they are issued. A key criterion here is the so-called Howey test. This is a testing procedure used in the U.S. by the SEC to determine whether a particular asset should be classified as a security. According to the Howey test, an asset is a security if it

• Involves an investment of money,
• is in a common enterprise, and
• Expects a realized profit from the efforts of a third party. That is, the investor must have little to no influence on the economic performance of the investment.

Many cryptocurrencies, especially those issued through Initial Coin Offerings (ICOs), can meet these criteria.

Only Bitcoin is considered a commodity

In Gary Gensler’s view, only Bitcoin could be considered a commodity, for the following reasons:

• There is no central authority for Bitcoin. This feature makes Bitcoin more of a commodity like gold or silver that can be mined, held, traded, and used as a medium of exchange independent of a central authority.
• Bitcoin has a limited supply of 21 million units. This is more akin to physical commodities than traditional currencies, which can theoretically be printed indefinitely by central banks. The limited supply adds to Bitcoin’s value and can make it a hedge against inflation, much like gold.
• Another aspect that classifies Bitcoin as a commodity is its use as a speculative asset. Bitcoin is subject to wide price fluctuations. This volatility is more comparable to commodities than stable currencies.
• The U.S. Commodity Futures Trading Commission (CFTC) defines a commodity as any item traded in a contract whose value is determined by market developments. Bitcoin is traded on multiple exchanges and its value is determined entirely by supply and demand. Gensler thus believes that only Bitcoin meets the characteristics of a commodity, which is why the CFCT should regulate Bitcoin.

When a cryptocurrency is classified as a security, there are significant regulatory implications, namely:

• All companies that issue securities must comply with disclosure requirements. This means they must disclose extensive information about their business, their financial situation and the risks of the investment.
• Securities usually need to be registered with the SEC before they can be sold to the public. If cryptocurrencies are securities and their issuers do not register them as such, the SEC can very easily take legal action. The SEC has taken action in this regard against several trading platforms in recent years, including Nexo, Paxos, and Gemini.
• Initial Coin Offerings (ICOs) that do not comply with the legal requirements for securities offerings could face heavy penalties if their tokens were classified as securities.

The taxation of altcoins as securities would also differ significantly from the taxation of goods.

If a view similar to that in the USA were to prevail in Germany, this would have quite considerable effects on taxation. Currently, taxation is based in particular on the one-year speculation period of Section 23 EStG. According to this, profits are not taken into account for tax purposes if the purchase and sale of the cryptocurrency are one year apart.

This would be over, at least for altcoins. Every sale transaction would be subject to taxation regardless of the holding period, but basically at 25% capital gains tax.

Companies that accept altcoins as payment will have to adjust their business models if altcoins are classified as securities

Such companies could be required to collect additional information from their customers and implement stricter compliance processes. In some cases, they might also decide to accept only Bitcoin or traditional currencies to avoid the complexity of complying with securities laws.

Summary

Although the final impact of these regulatory decisions remains to be seen, it is clear that they will create significant changes in the crypto industry. The classification of altcoins as securities would mean that they would have to face a stricter regulatory environment. Securities are subject to a variety of legal requirements and regulations aimed at increasing transparency and protecting investors. Bitcoin, on the other hand, which would be classified as a commodity, could continue to trade freely in the market. This could lead to a concentration of crypto activity on Bitcoin, as it would face fewer regulatory hurdles.