SEC Indicates Ether Not A Security
On the 14th of June, the eyes of the cryptocurrency and blockchain worlds turned to the Yahoo Finance’s All Markets Summit, which took place in San Francisco at the Nasdaq Entrepreneurial Center. At this event, the SEC’s director of corporate finance, William Hinman, made a statement that was particularly important for those involved with the second largest cryptocurrency and its underlying blockchain.
The key news came when Hinman said: “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,”. This indicates that the SEC is not intending to treat Ether as a security - something that now means that Ether and services around it, such as exchanges, could avoid many heavy regulations. Hinman also provided hope for other cryptocurrencies and blockchains that hope to avoid security regulations, saying: “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.”
This issue around the regulatory designation is not a new one; the matter became very public last year when the SEC declared DAO tokens to be a security after the debacle around the project made headlines worldwide. Some cryptocurrencies and tokens, like bitcoin and ether, are commodities or utilities; however, many others are viewed as securities as they fulfil the criteria of the Howie Test. At its core, the Howie Test determines whether transactions qualify as ‘investment contracts’ and therefore fall under the US Securities Act of 1933 and the Securities Exchange Act of 1934. In order to satisfy the test requirements, the action in question must essentially constitute an investment of money in a common enterprise, where profits are expected due to the efforts others.
Ether has generally been viewed as a commodity, but this opinion was challenged by news in April and May of this year where regulators were reported to be evaluating whether the Ethereum Foundation had too much control over the cryptocurrency, and might therefore that ether actually warrant classification as a security. At the time, co-founder of Ethereum, Joseph Lubin appeared unconcerned as he remarked that the company had spent significant time in talks with lawyers to ensure they were not offering a security. At the time he stated: “ it is not a security; it never was a security,”, and this now seems to have been affirmed by the SEC.
The price of ether, which had taken a hit following the rumours over the previous couple of months, rose sharply by around 7% in the immediate aftermath of the announcement, with many other cryptocurrencies also exhibiting a rapid rise. The long-term effects look positive if this news does not change and may continue to improve the price of cryptocurrency as it signals that the USA may be open to ether-based services, or signal that the US is now generally more open to cryptocurrency and blockchain innovation. This might not only have benefits in the US as other countries who have followed similar positions as the States in the past may take this news as a prompt to make the same move. Regardless, this is an important milestone for users of ether and Ethereum in the USA.