Officially, Ethereum is not a security
The Securities and Exchange Commission (SEC) does not consider Ethereum as security. The decision about the second largest cryptocurrency in the world, which was long waited for, could have far-reaching implications for cryptocurrencies, as well as companies pursuing Initial Coin Offerings or ICOs.
William Hinman, the director of the SEC’s division of corporate finance, said in one speech this week that putting aside the fundraising which accompanies the creation of Ether, based on his understanding of the present stadium of Ether, the Ethereum network, together with its decentralized structure, current offers and sales of Ether, are not securities transactions.
He also said that with Bitcoin, applying the disclosure regime of the federal securities laws of the current transactions in Ether would probably look to add some little value.
It is going to be subject to the investor-protection rules of SEC if Ethereum, with a recent global market cap of roughly $50 billion, was classified as a security. Certain exchanges which facilitate the trading of the cryptocurrency are also going to be required to register with the agency.
Instead, the SEC sees Ethereum, as well as some other tokens, more like it does Bitcoin. Bitcoin is currently classified as a commodity and falls under the regulations of the Commodity Futures Trading Commission.
How does the government decide what a security is and what is not security?
According to the 1949 Supreme Court ruling, the Howey test defines New York transactions, if a person invests his money in a collective enterprise and is led to expect profits only from the efforts of the promoter or from a third party, as investment contracts.
As both developers and investors fear that a security designation could come in the future, ICOs have been regulatory uncertainty. That could affect their capacity for raising funds or continue a project. While the companies usually use ICOs to fund projects, they mostly avoided the securities designation as the coins are created to work in the final product of the project, opposite of an expectation of future profits or ownership in the company.
Hinman said that Ethereum fails the Howey test. He also stated that when the efforts of the third party are no longer a key factor for determining the success of an enterprise, material information asymmetries recede. Being able to identify an issuer or promoter, to make the necessary disclosure, becomes quite difficult, as well as less meaningful, explains Hinman.
What does this decision mean for other Blockchain projects, as well as ICOs?
The founders and advocates of crypto praised the speech of Hinman, saying that it is going to help them continue innovation in the space. The price of Ethereum spiked as much as 7% on the news.
CoinCenter, which is a Washington D.C.-based non-profit, in one press release said that they are thrilled to see it take a robust pro-innovation approach to this nascent technology. With this guidance, they continued explaining, the SEC shows that taking a pro-innovation approach doesn’t have to be the expense of protecting investors.
CoinCenter also added that there are two cases in which they believe securities treatment is reasonable, of which the first one promises to deliver a future token to investors and the second one is tokens which represent specific contracted-for rights to profits from the efforts of a developer.
A former SEC lawyer, as well as Blockchain advisor, named Zachary Fallon, also praised the decision.
He said, for Business Insider, that the statement of Hinman about the status of Ether as a non-security, in particular, is significant as a concrete example of how a digital asset which potentially entered the market as security can transform through decentralization into something that is very different.
He also said that he gives credit to Director Hinman, as well as to the Division’s staff for continuing to keep an open mind and have positive and progressive opinion about technology and its relationships with the federal securities laws.