What is a security?
Know before you read
A security is an umbrella term used for virtually any asset issued by a company or other common enterprise that can be bought and sold, but classification depends on the regulator in a country. In the US, securities are grouped into three categories:
- Debt securities (cash and bonds)
- Equity securities (company shares)
- Derivative securities (futures contracts, etc.)
The US regulator, the Securities and Exchange Commission (SEC), uses the Howey test to determine whether an asset qualifies as a security. Bitcoin and Ethereum are not considered securities and don’t fall under the auspices of the SEC. The reason for this is complicated but it has to do with the fully decentralised nature of the Ethereum and Bitcoin blockchains and the currencies not forming part of a formal company or institutional structure.
- What is the Howey test?