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Ethereum is Not a Security, SEC Clarifies

 

A couple of days prior, the SEC (Securities and Exchange Commission) chairman, Jay Clayton affirmed that Initial Coin Offerings (ICO) is a security and thus bound by federal regulations that govern the operations of securities. He also stated that Bitcoin does not constitute a security. Clayton however fell short of stating the status of other digital currencies.

 

In what appears to be a sudden change in its earlier stance, SEC director of corporate finance, William Hinman has expressly stated that neither the Ethereum network nor its cryptocurrency Ether can be rightly considered as securities. He made thus assertion and several others while delivering a speech at the Yahoo Finance All Markets Summit in San Fransisco. A closer look at the two stance will reveal they aren`t contradictory at all.

 

During the speech, he made it quite clear that ethereum is not bound by laws intended to regulate securities (US securities law). Hinman noted thus: “Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions,” He further stated: “And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.”

 

Hinman intimated that cryptocurrencies could have a change on status some day and that such a change will be dependent on how sufficiently decentralization they eventually become. He explained:

 

If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.

 

Hinman further explained that that the status of an asset (whether or not it is a security) is subject to change; the change that may be effected in classifications boil down to the use(s) of such an asset. The mere fact that one considers a particular asset a “utility token” does not disqualify such an asset from being rightly referred to as a security, he explained, making reference to Supreme Court ruling issued some time back.

 

Hinman also explained that in spite of the fact that Ethereum and Bitcoin aren`t considered securities presently, such a status does not in any way prohibit consumers/users to use it as such.

 

He asserted that “if a promoter were to place Bitcoin in a fund or trust and sell interests, it would create a new security,” Hinman explained. “Similarly, investment contracts can be made out of virtually any asset (including virtual assets), provided the investor is reasonably expecting profits from the promoter’s efforts.”

 

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