The legality of selling trade signals for cryptocurrency is dependent upon the most pressing regulatory issue facing the industry – is the cryptocurrency in question a utility, security or commodity?
Trade signals, also known as trading signals or trading indicators, are indicators or triggers that suggest potential buying or selling opportunities in financial markets. They are generated by analyzing various factors such as price movements, technical patterns, fundamental data, or other market indicators. Trade signals aim to assist traders in making informed decisions about when to enter or exit trades.
The legality of selling trade signals in the United States can depend on various factors, including the specific nature of the trade signals and the applicable regulations
Commodity v. Security
The Commodity Exchange Act (CEA) is a United States federal law that governs the trading of commodities and futures contracts. The CEA’s definition of “commodity” primarily includes various agricultural products and livestock, as well as specific processed or derivative forms of those products. Moreover, under the CEA, a “commodity interest” is broadly defined to include several financial instruments and contracts related to commodities, including futures contracts, commodity options, swaps and leveraged transactions.
Notably, Bitcoin, Ethereum and Litecoin have been deemed to be commodities by the CFTC.
On the other hand, the Securities Act of 1933, which is a federal law in the United States, the term “security” is defined in Section 2(a)(1) and contemplates financial instruments that represent ownership or creditorship in a company or entity. This includes common stock, preferred stock, bonds, investment contracts and options, among other financial products.
The SEC has alleged that numerous cryptocurrencies were sold in unlawful unregistered securities offerings, including Ripple.
Commodity Trading Advisor Registration
A commodity trading advisor (CTA) is an individual or firm that provides advice or manages client accounts related to the trading of commodities or commodity futures contracts. CTAs are regulated by the Commodity Futures Trading Commission (CFTC) in the United States and are typically members of the National Futures Association (NFA), a self-regulatory organization.
However, offering advice solely on spot commodity trading does not typically require registration as a CTA with the CFTC. The CFTC’s regulatory oversight primarily extends to “commodity interests.” Thus, in the context of cryptocurrency, offering trade signals on spot trading does not required CTA registration. If, on the other hand, one offers crypto trade signals for futures, options, or swaps on Bitcoin, Ethereum or Litecoin – i.e., cryptocurrency commodity interests, then CTA registration would be required.
Investment Advisor Registration
An investment advisor is an individual or firm that provides advice and guidance to clients regarding investments in securities. The process of registering as an investment advisor required the filing of a Form ADV with the SEC and relevant state regulators. Generally, providing trade signals on security tokens as a standalone service may not require investment advisor registration.
There are, however, two additional points to consider which may trigger the requirement to register as an investment advisor:
- Nature of the Advice: The distinction between trade signals and personalized investment advice can impact the registration requirement. If the trade signals are general in nature, do not take into account individual client circumstances, and are not accompanied by personalized investment recommendations, registration as an investment advisor may not be necessary. However, if the trade signals involve providing personalized investment advice or recommendations, registration may be required.
- Compensation Structure: The method of compensation can also influence the registration requirement. If you charge a separate fee solely for the trade signals service and do not provide additional investment advisory services, investment advisor registration may not be necessary. However, if the trade signals service is bundled with personalized investment advice for which you charge a fee, it could trigger the need for investment advisor registration.
Conclusion – Utility Tokens
Of course, if the underlying coin or token that a trade signal provider is offering signals on is neither a commodity nor security, there are no regulatory requirements at this time. This is, of course, an extremely grey area to operate in as the ongoing debate as to the nature of the majority of leading cryptocurrencies is ongoing.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.
Find Adam: https://linktr.ee/adamtracy
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