New Jersey bill seeks to classify digital assets sold to institutional investors as securities

A bill that categorizes cryptocurrencies sold to institutional investors as securities was introduced to New Jersey’s general assembly on Nov. 30 by Assemblyman Herb Conaway Jr.

The proposed legislation mainly focuses on virtual currencies directly sold to institutional investors as it explicitly states:

“This bill classifies all virtual currencies issued and sold to institutional investors as securities.”

The bill defines institutional investors as entities like banks, hedge funds, endowments, private equity firms, pension funds, mutual funds, and other qualified institutional buyers recognized by federal regulators.

“Under the bill, a virtual currency, issued and sold directly to an institutional investor, will be classified as a security and be subject to the State’s “Uniform Securities Law” and any regulations promulgated by the Bureau of Securities in the Division of Consumer Affairs to effectuate the purposes of the bill.”

Meanwhile, the bill is limited in scope to the state level and might not align with the federal Securities and Exchange Commission’s (SEC) criteria.

Securities law

During the past year, the securities law has generated much attention from the crypto community due to how the SEC has weaponized it against the emerging industry.

For context, the financial regulator has classified more than 60 crypto assets as securities based on its interpretation of the Howey Test in different lawsuits.

The Howey Test is used to determine whether certain transactions qualify as investment contracts and, thus, are subject to securities laws.

The issues were further exacerbated when a U.S. court gave an ambiguous ruling about Ripple’s XRP. The court ruled that the programmatic sales and distributions of XRP are not securities because they do not meet the Howey Test criteria.

However, the same court found that XRP sales to institutional buyers could be considered securities due to their understanding of the link between XRP’s price and Ripple’s performance.

Meanwhile, major crypto stakeholders such as Coinbase CEO Brian Armstrong and crypto investor Mark Cuban have argued against the SEC’s interpretation. Instead, they urged the regulator to introduce new regulations tailored to the emerging industry’s needs.