Not a security since March

Reports circulating this week say the Securities and Exchange Commission and the Commodity Futures Trading Commission have declared bitcoin, ether and XRP not to be securities. They have, but not this week, as BigGo Finance's report acknowledges in its second paragraph. On 17 March the SEC voted to issue an interpretation of how the securities laws apply to crypto assets, the CFTC joined it, and it was published in the Federal Register and took effect on 23 March. It resurfaced on Monday because Michael Selig, the CFTC chairman, cited it in the op-ed launching his agency's first crypto rulemaking. "This follows a joint interpretation by the CFTC and SEC earlier this year, which clarified that a swath of crypto assets, including bitcoin and ether, are non-securities within the CFTC's regulatory authority."

What the SEC adopted matters as much as when. Release No. 33-11412 is a Commission interpretation, not a staff view and not a regulation. The three sitting commissioners, Paul Atkins, Hester Peirce and Mark Uyeda, all voted for it, according to the SEC's published vote record, and the record shows no dissent. Because it is an interpretive rule, the release says, it was exempt from notice and comment and took effect immediately, even though the White House budget office designated it a "major rule". It asked for comments only afterwards. "The interpretation in this release does not supersede or replace the Howey test, which is binding legal precedent." It makes one commitment about the agency's own conduct: "The Commission and its staff will administer the Federal securities laws consistent with the interpretation, including with respect to enforcement actions." "Although the Interpretation reflects a significant shift in the SEC's historic approach to crypto assets, it is not a binding, formal rulemaking," WilmerHale wrote, adding that a future SEC could rescind it without a rulemaking under the Administrative Procedure Act.

The substance is a taxonomy. The release sorts crypto assets into five categories: digital commodities, digital collectibles, digital tools, stablecoins and digital securities. The first three, in the Commission's view, are not securities in themselves; stablecoins may or may not be; tokenised securities are securities. A digital commodity, in the Commission's definition, takes its value from the programmed operation of a crypto system that is "functional", and from supply and demand, rather than from anyone's managerial efforts, and it carries no yield or claim on a business. The examples are Aptos, Avalanche, Bitcoin, Bitcoin Cash, Cardano, Chainlink, Dogecoin, Ether, Hedera, Litecoin, Polkadot, Shiba Inu, Solana, Stellar, Tezos and XRP. Meme coins are filed separately, as digital collectibles.

The list is less than it looks. Footnote 51 explains that those sixteen were chosen because each underlies a futures contract on an exchange the CFTC regulates, and that a futures market is not a requirement. It adds two that have none, Algorand and LBRY Credits, the token of a company the SEC once sued. "The Commission lists certain crypto assets that it views as digital commodities, including crypto assets that the agency previously alleged were securities in public enforcement and litigation matters," WilmerHale noted. The reasoning that does the work is general: "A digital commodity itself, as described in this release, is not a security because it does not have the economic characteristics of a security." The bar for "functional" is low: under footnote 49, a system qualifies if its native token can be used on it as its programming intends.

The second half of the release reaches further than the list. A token that is not itself a security can still be sold "subject to" an investment contract, which is a security, when an issuer induces buyers with promises of essential managerial efforts. The Commission's new position is that the contract can end: when the issuer has fulfilled those promises, or when buyers can no longer expect it to, as when it publicly abandons them, the token "separates" from the contract and, from then on, is outside the federal securities laws altogether. Atkins put it plainly in the press release: "And it reflects the reality that investment contracts can come to an end." Jim Moloney, the director of Corporation Finance, was more theatrical in a staff statement that retold the Howey orange groves as a fairy tale: "For now, this closes the final chapter in the book of Howey."

It does not close everything. Separation does not erase the past: an issuer that sold an unregistered investment contract can still be liable for that offering, and for misstatements, even after the token separates. The release does not touch tax law or anti-money-laundering rules. Its stablecoin conclusion covers only the "Covered Stablecoins" described in an earlier staff statement. And the CFTC's part is guidance that it will administer the Commodity Exchange Act consistently and that such tokens "could" be commodities. That gives it no new authority over spot markets, which is why its own plan has to work through leverage.

Almost everything the SEC has done on crypto since is built on top of the March release. Regulation Crypto Assets, voted on 18 August, would turn separation into a safe harbour backed by a filing, Form TR; comments close on 20 October. On 25 September the Division of Corporation Finance published FAQs applying it, and edited the buyback answer three days later. Those carry far less weight, and say so: "Like all staff guidance, these FAQs have no legal force or effect, do not alter or amend applicable law, and do not create any new or additional obligations for any person." One answer narrows the release: separation does not occur if another party assumes the issuer's promises, "whether affirmatively or by operation of law". The crypto custody proposal of 1 October is open for comment until 7 December.

Objections came on day one. "The SEC's refusal to treat crypto assets as securities endangers investors everywhere," Benjamin Schiffrin, director of securities policy at Better Markets, said on 17 March. He argued that people buy crypto to invest, not to use, and attacked the procedure too. "Perhaps most troubling about the SEC's interpretation is that it is not the product of notice-and-comment rulemaking."

That procedural point is now the substantive one. In March Atkins had called it a bridge. "This effort serves as an important bridge for entrepreneurs and investors as Congress works to advance bipartisan market structure legislation, which I look forward to implementing with Chairman Selig in the near future." The far side of the bridge fell away on 15 September, when the CLARITY Act stopped at 49 votes. Peirce, who led the SEC's crypto task force, has since left, and the commission now has two members. JPMorgan told clients that agency rules are less durable than legislation because they can be changed or challenged in court, 24/7 Wall St reported. Everything above rests on the March interpretation, which arrived by a three-to-nothing vote without a comment period; on WilmerHale's reading, a different commission could take it back the same way. So the answer to this week's headlines for bitcoin, ether and XRP: not securities, in the SEC's view, since March, for as long as the SEC holds that view.