Comments / Author: Zhu Weisha / January 3, 2025

The author is located in Hong Kong, and all regulatory issues are also based on Hong Kong as an example. This is a series, starting with concepts.

Conceptual issues

Definitions of cryptocurrency and virtual currency

In the consultation document of the Securities Regulatory Commission's regulatory provisions dated February 20, 2023, it states: 'Virtual assets generally do not have any actual value and are easily affected by large fluctuations and market manipulation issues.'

There are two questions here:

1. If there is no value, it should not be traded. Trading something without value is a Ponzi scheme. The Securities Regulatory Commission's statement lacks rigor.

2. What is actual value? Value is subjective; many meme coins correspond to emotional value. Can you say they have no value? This is a matter of perspective, which is why trading exists.

The term virtual currency is inappropriate, as it suggests something false and does not align with the reality of cryptocurrency development.

In discussions between Satoshi Nakamoto and group friends, the concept of cryptocurrency was affirmed. 'Crypto' represents technological methods, while 'currency' represents financial attributes. Satoshi Nakamoto's views have withstood the test of time and gradually gained consensus in the industry. The Securities Regulatory Commission should abandon the concept of virtual currency from a conceptual standpoint; it was understandable in the early days when everyone was ignorant, but it seems outdated today.

What are equity securities and their original definition?

I have looked at the consultation documents from the Securities Regulatory Commission and the VASP licensing documents, and neither makes a clear definition of securities. The commonly accepted definition of securities is roughly the same; here is a definition from Baidu Encyclopedia: 'Securities mainly include capital securities, monetary securities, and commodity securities, etc. In a narrow sense, securities primarily refer to the securities products in the securities market, which include equity market products such as stocks, debt market products such as bonds, and derivative market products such as stock futures, options, and interest rate futures.' According to this definition, all cryptocurrencies are securities. The Securities Regulatory Commission should regulate the narrow definition of securities.

How to distinguish whether a cryptocurrency is a security? The U.S. has provided the Howey Test. This is a concept from 1932, used to test cryptocurrencies, which has caused a significant backlash in the industry. The current chair of the U.S. Securities and Exchange Commission has received very low ratings, primarily due to improper regulation of cryptocurrencies.

Things that do not align with practice need to change existing regulations rather than adapt them to fit. How to define must return to the essence of the concept. The comparison object between the Securities Regulatory Commission's securities and cryptocurrencies is equity securities.

What are the attributes of equity securities? Ownership, control, and profit rights.

This is a simple definition of equity. Compare it with:

Are Bitcoin and Ethereum equity securities?

In the Bitcoin system, the beneficiaries are the miners; they do not have control over Bitcoin. Some control is held by programmers due to the checks and balances from the miners. Therefore, it is not absolutely 'controlling'. No party has complete control. From a securities perspective, the Bitcoin system should belong to the holders, but the holders do not have a realization of ownership in the Bitcoin system. The Bitcoin system does not belong to anyone, thus Bitcoin is not an equity security.

From the perspective of future development, the Securities Regulatory Commission should start from protecting investors and urge Bitcoin to establish a holder foundation. However, this is something it cannot achieve.

The beneficiaries of the Ethereum system are the collateral providers; they have no control over Ethereum. Ethereum holders cannot restrict the Ethereum Foundation, which has gained complete control over the Ethereum system after its transition to POS. The Ethereum Foundation does not own the Ethereum system but has limited profit rights, which do not constitute complete equity.

However, the lack of checks on control equates to risk. Similarly, Ethereum also needs a foundation involving holders to actually acquire ownership of the Ethereum system. Where there is risk, regulation is necessary. In other words, whether the foundation has ownership of Ethereum or not, the Ethereum system needs to be regulated.

Are meme coins considered equity securities?

https://chainless.hk/zh-hans/2025/01/01/%e5%8a%a0%e5%af%86%e8%b4%a7%e5%b8%81%e7%9b%91%e7%ae%a1%e6%89%80%e5%ad%98%e5%9c%a8%e7%9a%84%e9%97%ae%e9%a2%98%ef%bc%88%e4%b9%8b%e4%b8%80%ef%bc%89/