In June 2023, the U.S. Securities and Exchange Commission (SEC) filed charges against both Binance and Coinbase for operating as unregistered securities exchanges. Binance and Coinbase are two of the world's largest crypto exchanges1. The SEC alleges that Coinbase traded at least 13 crypto assets that are securities and should have therefore been registered with the SEC. Binance has been charged with the same offence for offering 12 crypto assets that, according to the SEC, constitute securities.
This lawsuit brings into perspective the assertion by the SEC that crypto assets, which are also referred to as virtual currencies, digital/virtual assets or digital/virtual tokens, constitute securities. The SEC has regulatory authority over the issuance and sale of securities in the U.S. Although the purport of this article is not to delve into the law regulating 'securities' in the U.S., it is nevertheless important to understand what constitutes 'security' under U.S. law. The Howey test is commonly used in the U.S., which defines a security as including an "investment contract". In SEC v W.J. Howey Co., 328 U.S. 293, 301 (1946) the U.S. Supreme Court defined "investment contract" as an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
One of the legal issues that will need to be determined in the lawsuits against Binance and Coinbase will likely turn around whether virtual tokens are securities. The outcome of those lawsuits will be pivotal in shaping the future of the regulation of cryptocurrencies in the U.S.
The situation is different in Mauritius since the proclamation of the Virtual Assets Initial Token Offering Services ("VAITOS") Act in February 2022.
The VAITOS Act (the "Act") delineates the boundaries between virtual tokens and securities. The Act defines virtual assets (including virtual tokens) as excluding inter alia a digital representation of securities. Instead, such digital representation constitutes a 'security token'2, which falls under the purview of the Securities Act, and not the VAITOS Act.
Against this background, virtual asset service providers choosing to be licensed in Mauritius might not encounter the same uncertainty as in the US. The demarcation of regimes between 'securities ' and 'virtual asset' is set out in legislation, which greatly minimises the grey areas giving rise to the current dispute in the US. With an innovative and dynamic legal framework in relation to the development and use of digital assets, in addition to being on the OECD, FATF and EU's 'white list', Mauritius is well poised to attract virtual asset service providers looking to scale-up their operations on the African continent.
Footnotes
1. A crypto exchange is a market place where cryptocurrencies are bought and sold. Depending on the platform users can exchange one type of cryptocurrency against another or buy cryptocurrencies using fiat money like USD and EUR.
2. Guidance on Security Token Offerings and Security Token Trading Systems
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
