Before the recent surge in prices, the beginning of March was a rough time for crypto. Multiple lawsuits against crypto companies came about, and fears of coming regulation increased as investors prepared for the worst.
Since then, talks of widespread regulation seem to have cooled as the recent banking fiasco has taken center stage and the crypto market has been on a tear. But there is still plenty of reason to believe that regulation of crypto will be coming to the U.S., and investors need to make sure they are prepared when this day comes. It isn't so much a matter of if, but when.
The current crypto landscape
Due to the complexity and vastness of the cryptocurrency asset class, legislators have struggled to implement any sweeping regulation. Despite this, past comments from key officials have shed light on the possible path of action they will take, and it boils down to one thing: Is crypto a commodity or a security?
To answer this polarizing question, lawmakers typically summon what is known as the Howey test to define whether an asset is a security. Deriving its name from a 1946 Supreme Court case, the Howey test analyzes an asset in four ways to determine if it is a security. The Howey test says assets are considered to be securities if there is an investment of money in a common enterprise with the expectation of profit derived from the efforts of others.
I hate to be a buzzkill, but this sounds like most cryptocurrencies in circulation today.
What looming regulation could look like
So why does this all matter? Well, it's relatively simple. Should legislators deem that most of crypto is a security, then that means the entire landscape will dramatically change. Just like publicly traded companies that offer shares of stock, cryptocurrencies that are considered securities will have to register and comply with rules enforced by the Securities and Exchange Commission (SEC). This will ultimately lead to more stringent reporting to ensure cryptocurrencies are meeting transparency standards. It will also create more barriers, and subsequently create a less than ideal environment for price appreciation.
On the contrary, should a cryptocurrency not pass the Howey test and be considered a commodity, then the amount of possible regulation dwindles significantly as commodities are not held to the same standard as securities.
With this in mind, it is crucial for investors to tailor their portfolios to prioritize cryptocurrencies that are most likely to be considered commodities, as it will ensure the least amount of disruption.
By using this approach, two options come to the forefront -- Bitcoin (BTC -4.49%) and Ethereum (ETH -3.75%).
When asked about his thoughts on Bitcoin, SEC Chairman Gary Gensler has said on multiple occasions that he views Bitcoin as a commodity. This is likely due to the fact that there is no single, well-known group or person that keeps Bitcoin running and as such, it doesn't pass the Howey test. It truly is a decentralized network, and this is the primary reason most other legislators happen to agree with Gensler.
However, while there seems to be consensus that Bitcoin is a commodity, there is open debate as to whether or not the world's second most valuable cryptocurrency, Ethereum, falls into security or commodity territory.
Surprisingly, while Gensler claims Ethereum is a security, his counterpart at the Commodities Future Trading Commission (CFTC) believes it meets the criteria of a commodity and thus is out of the SEC's jurisdiction.
Whether this is the case or not will likely take more time to determine. But the key point is that there are split opinions. This could be viewed as a positive development for Ethereum.
Making a game plan today
Moving forward, crypto investors in the U.S. should attempt to prioritize investing in cryptocurrencies that could be considered commodities. That makes the list relatively short since it likely only includes Bitcoin and Ethereum. But when taking into account that these two make up more than 60% of the value in the entire industry and most other cryptocurrencies' prices are correlated to them, it could actually come to be the most profitable strategy.
While cryptocurrencies are traded internationally and not wholly subject to just the decisions made by regulators in the U.S., there is little doubt that sweeping and dramatic regulation would negatively impact the majority of cryptocurrency prices. As it seems like this reality will come to fruition sooner than later, it would be advisable for investors to keep their crypto portfolios simple and prioritize investing in assets like Bitcoin and Ethereum.
