Other Assets

The whole unit on one sheet: what is a security and what is not, who regulates it, and the risks the exam loves to test.

Which One-Liners Win Points?

• The CFTC regulates commodity futures and options, not the SEC.
• A commodity-related security (an ETF holding commodity futures) IS regulated by the SEC because the ETF itself is a security.
• Physical gold bars and coins are NOT securities; a gold ETF or a mining stock IS a security.
• A commodity pool works like a mutual fund for futures and options; the commodity pool operator (CPO) generally must register with the CFTC, unless an exclusion or exemption applies.
• Hedging locks in a price to reduce risk (an airline buys crude oil futures); speculation takes a position purely to profit from price moves.
• Bitcoin is generally NOT sold as a security: buyers aren't relying on a central promoter's efforts to profit.
• Initial Coin Offering (ICO) token sales are often securities transactions: investors buy expecting a development team to build value, which can satisfy all four Howey prongs (each offering is analyzed on its own facts).
• Lost private keys can mean permanently lost assets for self-custody without a recovery phrase. There is generally no institution to restore access and no "reset password" option.

Who Regulates Commodities and Precious Metals?

• Commodities are physical goods in three categories: agricultural (wheat, corn, soybeans), energy (crude oil, natural gas), and metals (gold, silver, copper). Standardized futures contracts on these goods trade on regulated derivatives exchanges.
• Traded mainly through futures contracts on exchanges like the CME Group and ICE (Intercontinental Exchange); prices move on supply and demand, weather, geopolitics, and currency swings.
• The four primary precious metals: gold, silver, platinum, and palladium; often held as a hedge against inflation and currency devaluation, with gold the classic safe haven.
• Security or not: physical coins and bars (no), futures contracts (no, commodity, CFTC), ETFs like GLD and SLV (yes, SEC), mining company stocks (yes, SEC).
• Physical metals pay no dividends or interest; returns depend only on price appreciation, and storage, insurance, and dealer markups cut into net returns.

When Is a Digital Asset a Security?

• Digital assets include cryptocurrencies, tokens, and other blockchain-based assets; they exist only as entries on a distributed ledger, not in physical form.
• Cryptocurrencies are decentralized digital currencies, not issued or backed by any government or central authority; they are not securities by default, though tokens sold as investment contracts may be.
• Blockchain is a distributed ledger recording every transaction across a network, with transparency, immutability, decentralization, and transactions that are typically irreversible.
• Wallets store the private keys that access crypto: a hot wallet is online (lower security, frequent trading), a cold wallet is offline hardware (higher security, long-term storage).
• The Howey Test (SEC) applies to a specific offer or sale, not permanently to the asset; that transaction is a security only if ALL four prongs are met: investment of money, common enterprise, reasonable expectation of profits, and profits derived from the efforts of others.
• Digital assets are highly volatile, have limited valuation metrics (no earnings or dividends), and generally show low or unstable correlation with stocks or bonds; they trade on exchanges, some regulated and some not.
• Key risks: volatility, regulatory (evolving framework), cybersecurity (exchange hacks, wallet compromises, stolen keys), liquidity (some assets trade thinly), technology (bugs, network failures, forks), and fraud (scams, pump-and-dump, unregistered offerings).

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

• If you see "physical" precious metals, think not a security (owning bullion isn't CFTC-registered either, it's simply outside securities regulation); if you see an ETF or mining stock, think SEC and security; if you see a futures contract, think CFTC.
• Generally no SIPC or FDIC protection for crypto holdings. If an exchange fails or is hacked, investors typically have no federal safety net and may lose everything (a registered security or qualifying cash sweep may receive limited protection).
• The exam asks you to apply the Howey Test to a scenario, not to memorize which specific coins are securities.
• Regulatory risk is the most distinctive risk for digital assets: a single government action can change value and legality overnight.
• Blockchain transactions are typically irreversible, with no built-in reversal mechanism; an error or theft is generally permanent, unlike a bank account.

One-Breath Recap

Other Assets is one question: is it a security, and who regulates it? Commodity futures and options fall under the Commodity Futures Trading Commission, physical precious metals are not securities at all, a commodity Exchange-Traded Fund or a mining stock is a security under the SEC, and a commodity pool operator generally must register unless an exclusion or exemption applies. Digital assets turn on the Howey Test applied to the offer or sale (investment of money, common enterprise, expectation of profits, efforts of others, all four required), so Bitcoin is generally not sold as a security while many initial coin offering token sales are. Crypto generally has no Securities Investor Protection Corporation or Federal Deposit Insurance Corporation protection, lost private keys can mean lost assets in self-custody, and regulatory risk is its most distinctive danger.

Need more than the recap? Read the full Other Assets unit.