Ethereum & Bitcoin Rise as U.S. SEC Confirms Neither Are Securities

U.S. SEC's William Hinman speaking at the Yahoo All Markets Summit: Crypto and confirming that Ether would not fall under the category of a security.
U.S. SEC’s William Hinman speaking at the Yahoo All Markets Summit: Crypto and confirming that Ether would not fall under the category of a security.

San Francisco, CALIFORNIA – The price of Ether recovered today and crossed the psychologically important resistance of US$500 and continued to trade above US$500 as at 3.30 a.m. Eastern Time on the back of clarification from the United States Security and Exchange Commission (SEC) confirming that both Bitcoin and Ether are not securities. Earlier this month, U.S. SEC chairman Jay Clayton told CNBC’s Bob Pisani that Bitcoin was not a security, but would not be drawn into using that classification with other cryptocurrencies and when asked point blank whether or not Ethereum was a security, the SEC chief refused to comment. That news did little to settle the already downward trending price of Ethereum. But the latest pronouncement by the SEC has helped to float the price of Ethereum somewhat. On Thursday, William Hinman, head of the Division of Corporation Finance at the SEC said in a speech at the Yahoo All Markets Summit: Crypto conference in San Francisco,

“Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers.”

According to Hinman, the primary issue in determining whether cryptocurrencies and initial coin offerings or ICOs were securities was the expectation of a return by a third party. For purchasers of the digital asset, the key was whether they were purchasing the asset to seek a return on the investment. And fundamental to that expectation was whether the issuer of that asset plays a significant role in its development and maintenance, if so, combined with the expectation of a return, the asset would likely be classified as a security.

Ethereum has emerged as the winner in the Chinese government's blockchain beauty pageant, knocking out such favorites as NEO and Bitcoin, with the latter coming in at a noticeably low thirteenth place ranking.
Ethereum has emerged a winner in the race to not be classified as a security, forming only the second cryptocurrency which has been unequivocally declared so by the SEC. 

Hinman also provided examples where crypto assets would not be considered securities and would therefore not come under the jurisdiction of the SEC. Just like his boss Clayton, Hinman said that Bitcoin was not a security, because there was no central party whose efforts were a key determining factor in the enterprise. But more importantly, Hinman went one step further and judged Ethereum not to be a security because the Ethereum network was also decentralized.

But the flip side of Hinman’s explanation is that all other ICOs are potentially securities. ICOs are typically what is known as a “hard fork” from the Ethereum network. Companies looking to issue their own digital tokens, use the base open source Ethereum code and then issue their own ERC20 digital tokens on the basis of that code to create their own digital tokens. But because these digital tokens have a centralized issuing authority – the company – which also maintains the digital tokens and has an interest in seeing the value of those tokens appreciate as well as investors in these tokens expect such appreciation, potentially all ICOs could come under the jurisdiction of the SEC.

U.S. SEC chairman Jay Clayton had eaerlier confirmed that Bitcoin was not a security but would not go further than that.
U.S. SEC chairman Jay Clayton had eaerlier confirmed that Bitcoin was not a security but would not go further than that.

Hinman however provided guidance as to how ICOs could avoid being labelled as securities, for instance by structuring the digital tokens as consumer items and particularly if the tokens were purchased for personal use and not as an investment. But with the majority of ICOs attracting all manner of investors and punters, the clarification makes it particularly challenging for companies considering the issuance of an ICO where no such function for their digital token exists. Hinman went further to provide examples of such products, such as membership into a golf club or book club, were likely to not be securities.

Hinman defended the SEC’s strict interpretation of securities laws, adding,

“Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.”

“Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.”