HomeCryptoWhy Crypto’s are Not Securities (Part 1)

Why Crypto’s are Not Securities (Part 1)

What do tokens have in common with apples?

Let’s compare crypto’s to a bushel of apples.

If I grow some apples (i.e., software developers) and I give, or sell, shouldn’t matter, a bushel of apples (cryptocurrency) to you for $100 and keep some for myself, we each have some apples that I grew. Other apple owners could be people that traded for, bought or were given some of my juicy, delicious apples.

Now, you choose to eat, sell, keep, throw away, turn into applesauce, whatever, those apples in your possession. It isn’t my business and shouldn’t be anybody else’s business either. I go back to my apple orchard and continue to improve it, cross breed some trees to make the apples even sweeter, irrigate the orchard, fertilize it, clean and polish the apples I have already picked, whatever I choose to do.

You know that I am a good grower (i.e., developer) and you think, hey, if Rob keeps improving on those apples, maybe someone someday might want to pay me more dollars than I had to pay for these apples because of nostalgia or the fact that word has gotten out about how great my apples are, or for whatever reason.

The bottom line is you will only have a bushel of apples. No more, no less. They have not gone up magically in the number of apples. One bushel = one bushel. No expectation of gain and no promise given because this is just a bushel of an inanimate object. They can’t appreciate against themselves. If they appreciate against a fiat currency, that is out of our control and irrelevant.

What if the dollar depreciates against that bushel of apples? What if you can now sell them for $200? Well, technically speaking, you would have a taxable gain of $100 if you sell them for $200. Fine. But was there an investment contract between us? How was that bushel of apples supposed to generate cash flow? Pay dividends? Increase in number of apples? What kind of agreement was given or even implied that the apple would be worth more dollars? With anything you own, if the dollar is depreciating versus that asset or object, it’s not some hidden “investment contract” that is making the exact same number of “whatever” you bought go up in dollar terms.

Those apples didn’t represent ownership of my orchard (i.e., development team). They had no expectation or profit generating capability built into them. Plus, they didn’t create value in and of themselves, even if you can sell them for more dollars today. The dollar might have dropped in value versus the bushel of apples, thus you and the market would demand more dollars for that same bushel. I put that on the U.S. government and their profligate spending and money creation for any specific thing being worth more of their fiat currency in the future.

Maybe there is a perceived appreciation in the value in fiat currency of the apples, but that only means the dollar is depreciating against your commodity. You still only have one bushel of apples. It’s just an inanimate object that has a set of attributes included in it’s DNA.

This article is about most general crypto’s. Crypto’s could be designed specifically to act like securities or represent existing securities on the digital blockchain, but that’s a different story. I am going to have to write this in parts because this is a very simple concept, yet can also get very complex and confusing at the same time. Suffice it to say, crypto’s, as most are issued and exchanged are not securities. Once this eco system develops to the point you never move in and out of the fiat money system, it will become very obvious cryptocurrencies never were securities, unless implicitly designed to be one. More to follow.

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