'Ethereum is not a security' says SEC official

A simplified summary of the statement by the SEC official

Photo by Thought Catalog on Unsplash

A few hours ago, the information broke that gave a boost to the crypto community. It was an answer to a long standing debate. Before we go into the actual event of what was said and he said it, let’s look into why it is important. To say that owning cryptocurrencies alludes to owning securities would mean that the government will treat your ownership of bitcoin like the ownership of Apple stock. The major fear here is taxes. If people are going to be punished with taxes for owning crypto, then you can be sure lots of people will back out. And as you can see the crypto market got a little jerk up after the information broke.

The statement that Ethereum is not a security is not an official statement (yet). But it reveals the thought and perspective of the SEC to the crypto ecosystem. First, the statement was made by the Head of the SEC’s division of Corporation Finance at the Yahoo Finance Summit, yesterday 14th of June 2018. What he said is actually his personal interpretation of the law, but this is a top official and his personal interpretation will most likely be the stand of the SEC. His name is William Hinman.

What the official said is simple and clear. He said that the ether token is not a security. He also pointed out bitcoin is not also but all the attention is on ether because of the long term argument based on the structure of Ethereum. Now, he said that the sale of ether by the Ethereum Foundation is a security but the ether token today is not a security. This is the confusing part for many, but it is just as simple.

It means when the Ethereum Foundation raised money by offering ether to its investors, that was a security (this was not explicitly said though). But now that the platform is live and ether is gas for transaction and price of ether is not primarily affected by the actions of the Ethereum foundation, it is no more a security. That is clear and very reasonable.

Apparently, the SEC official believes that when a token becomes truly decentralized, it is no longer a security. He defines decentralized as when the purchasers (of the token) no longer reasonably look to any person or group to carry out essential managerial and entrepreneurial efforts (concerning the token). This means that the efforts of a third party are no longer directly connected to the success of the enterprise. Both bitcoin and ether have their prices independent of the Bitcoin Foundation and Ethereum Foundation respectively. This means they are not a security. The Bitcoin Foundation and Ethereum Foundation owe you nothing if you own bitcoin or ether.

A token, (in the words of Hinman) can evolve from a security to a nonsecurity. This is not surprising at all looking at the explanation of security and decentralization that has been given. Some tokens however, could qualify as securities. The official did not specify or give any example of this. But if it involves buybacks, creating a secondary market for it beyond the natural forces of demand and supply, it will be classified as a security.

Finally, Hinman said a token might be a security if:

  • Someone (or a group) is artificially setting the price
  • Someone (or a group) is influencing secondary market or trading
  • If there are buybacks
  • The token is being sold in such a large quantity that outweighs potential use

However, the following would weigh against security status:

  • If the token has baked-in incentives for use that discourages holding for price appreciation
  • If the targeted audience in advertising is people who would (most likely) use the token and not the general public

P.S. The facts of this information is courtesy of Marco Santori (on Twitter)

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