The second-largest cryptocurrency in circulation behind bitcoin, ethereum, has been brought into spotlight these days as the Securities and Exchange Commission (SEC) is considering whether it should be classified as a security or not. The decision of ethereum’s regulatory fate will have far-reaching consequences for most cryptocurrencies in existence. Besides, SEC decision on this case will affect other countries’ regulatory stance on cryptocurrency.

Ms Xiao Sa, a lawyer with Beijing Dacheng law firm who specialises in the area of internet finance and ICO, shared her insights into issues like whether cryptocurrency should be qualified as a security and the definition differences of”security” between China and the United States, in a recent interview with 8btc.

China has ruled that bitcoin is a virtual commodity. Will other cryptocurrencies  will fall into the same category?

Xiao: We can’t group all cryptocurrencies together, and should treat them differently. In Chinese context, bitcoin is a virtual commodity, and it is legal here. But for other cryptocurrencies, such as tokens issued through ICO, it is no appropriate to consider them as virtual goods because they are not reliable and face an uncertain future.

Is there any difference in the definition of “security” between the United States and China?  If the SEC chooses to label Ethereum as a security, will it affect the decision of regulators in China ?

Xiao : “Security” is more broadly defined in the United States than in China. Chinese law strictly defines “equity” and “security”. According to the ICO ban statement jointly released by the People’s Bank of China(PBOC) and other six state ministries and commissions last September, ICO activities can hardly be counted as the violation of the legal provision of issuing unauthorized securities under current Chinese securities law.  It can only be said that they illegally issued voucher.

Further, China’s civil law system is quite different from America’s case law system. Our laws and regulations are relatively stable and more rigorous,and clearly stipulate what behaviors are illegal.

So far, we can still not assert that certain cryptocurrency should be classified as a security. It requires strict explanation.

Chinese law has its own logic. However, if SEC labels ethereum as a security after big data analysis, a corresponding assessment and the Howey Test, China may draw on American lessons when it comes to defining the nature of cryptocurrency,and then review it with our own logic.

Why will the issue of whether certain cryptocurrency should be classified as a security have a big impact on the blockchain world?

Labeling a cryptocurrency as a security and a non-security has different legal consequences. In China, there is a crime, called issuing unauthorized securities. Article 179 of China’s Criminal Law stipulates that whoever issues shares or company and enterprise bonds involving a large amount of money without the permission of relevant state departments shall be suspected of a crime.

If a cryptocurrency or ICO tokens are not considered as stock or a security in China, they are not subject to Article 179. But if cryptocurrency-related activities seriously disturb social order, they may be considered as illegal business acts, according to Article 225 of the Criminal Law.

Will most cryptocurrencies be labeled as a security?

Personally, many cryptocurrencies will be labeled as securities. I think many countries, including China, will consider virtual currency as a security, a share or a bond, in order to strengthening supervision. And previous behaviors will be held accountable too.

In America, the Howey Test, a legal precedent that guides whether an asset is classified as a security or not, is popular among many cryptocurrency companies now. The Howey Test is considered by SEC as a yardstick to new ICOs and those currently running.But the SEC chairman Jay Clayton has repeatedly stated in public appearances his belief that every ICO token he’s seen is a security. Thus most ICO tokens will be regulated by the SEC.

Assuming that certain cryptocurrency would be defined as a security, who could face a penalty?

Xiao: Core team members. ICO founders now prefer to establish a foundation in Hong Kong, Singapore or other places, seeking to avoid legal risks. This is a naive thinking. If profitable financial behaviors are suspected of a fraud, or cryptocurrency scams, they should fall under the regulatory authority of related government agencies. If ICO projects are considered legal in the country they issue tokens, and don’t sell tokens to Chinese, they may not be regulated by Chinese regulators.

Besides, backers who help promote the ICO scam and get profits, as well as some cryptocurrency exchanges that have listed these cryptocurrencies, may still be held accountable.

If crypto investors buy those tokes even though they know his actions were unlawful, token buyers will not be identified as victims, but rather crowdfunding participants, and they will not be protected by laws.

Does it mean the definition of cryptocurrency is determined by regulators rather than the law?

Bitcoin has been legally identified as a virtual good in China, but it’s not appropriate to group all cryptocurrencies together because some cryptocurrencies do not have such high liquidity as bitcoin. While bitcoin in some countries have be treated as a payment means, many other tokens are regarded as a source of speculation or using them for the underlying service.

Therefore, in order to protect financial consumers,Chinese regulators will not give all cryptocurrencies legal status.