What Is a Security Swap and What Does It Have To Do With Crypto?

As cryptocurrencies have become increasingly prominent in mainstream media and economics, governments have struggled to define boundaries for these digital currencies. A large part of why crypto has been as successful is because of how unregulated it is; however, as businesses and corporations begin to accept cryptocurrencies in exchange for goods, regulations continue to be created.

The United States Securities and Exchange Commission is looking to enforce new rules regulating and registering security-based swaps, including cryptocurrencies. “Swaps” are financial contracts in which two counterparties agree to exchange or “swap” payments with each other as a result of a plethora of factors. These can include a change in stock price, interest rate, or commodity price. Security-based swaps are negotiated between two counterparties and are based on a single security or loan. 

The proposed changes to security-based swaps are designed to increase transparency and reduce the risk of these kinds of swaps to the market. The changes include counterparty protections, requirements for capital and margin, internal risk management, supervision, chief compliance officers, trade acknowledgment and confirmation, recordkeeping, and reporting procedures.

Where cryptocurrencies come into the situation is that if cryptocurrencies are the products of security-based swaps. For example, if a security-based swap is made of crypto as a result of falling crypto value. People will swap to release the risk of falling value from them onto their counterparty. This is the same for routine security-based swaps. However, now the SEC has included cryptocurrencies as a product that can be regulated within security-based swaps.

SEC Chairman Gary Gensler explained the changes in a speech to the American Bar Association Derivative and Futures Law Committee. In this speech, he explained, “It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides a synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”

While security-based swaps may seem extremely specific and a small part of how crypto may be regulated in the future, it is vital to note the small regulations being put in place. With every regulation, cryptocurrency takes a step towards becoming a more valuable and powerful form of currency. Where crypto stands now, every trade and rise and fall of value is a risk that individuals or businesses indulge in. As regulations begin to flow and structure what crypto can and cannot do or where it can and cannot be applied, it will be interesting to see the currency grow and mold into a more mature currency. 

Works Cited

Hayes, A. (2021, July 07). Credit Default Swap (CDS) Definition. Retrieved from https://www.investopedia.com/terms/c/creditdefaultswap.asp

McBride, L. (2021, July 21). SEC Chairman says cryptocurrency falls under security-based swaps rules. Retrieved from https://cointelegraph.com/news/sec-chairman-says-cryptocurrency-falls-under-security-based-swaps-rules

SEC Chairman Outlines Regulation of Crypto Assets Relating to Security-Based Swaps – Regulation Bitcoin News. (2021, July 22). Retrieved from https://news.bitcoin.com/sec-chairman-regulation-crypto-assets-security-based-swaps/

U. (n.d.). The Regulatory Regime for Security-Based Swaps. Retrieved from https://www.sec.gov/swaps-chart/swaps-chart.pdf