Jeremy Waldorph for Yahoo Finance
Ethereum is officially not a security.
The long-awaited decision on the world’s second-largest cryptocurrency could have far-reaching implications for cryptocurrencies and companies pursuing initial coin offerings, or ICO’s.
“Putting aside the fundraising that accompanied the creation of Ether, 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,” William Hinman, director of the Securities and Exchange Commission’s division of corporate finance, said in a speech this week (emphasis ours).
“And, as with bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value. “
Had ethereum, which now has a global market cap of roughly $50 billion, been classified as a security, it would have been subject to the SEC’s investor-protection rules. Certain exchanges that facilitate trading of the cryptocurrency would also be required to register with the agency.
Instead, the SEC appeared to view ethereum and similar tokens more like it does bitcoin, which is currently classified as a commodity and falls under the auspices of the Commodity Futures Trading Commission.
How the government decides what’s a security and what’s not
Using wording from a 1949 Supreme Court ruling, the Howey test defines New York transactions as investment contracts if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
ICOs have been in a state of regulatory uncertainty as both developers and investors fear a securities designation could come in the future. That could affect their ability to raise funds or continue a project. While the companies often use ICOs to fund projects, they’ve largely avoided the securities designation because the coins are designed to work in the project’s final product, as opposed to an expectation of future profits or ownership in the company.
Ethereum fails the Howey test, Hinman said.
“When the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede,” Hinman said. “The ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.”
What the decision means for other blockchain projects and ICO’s
Crypto founders and advocates praised Hinman’s speech, saying it will help continue innovation in the space. The price of ethereum spiked as much as 7% on the news.
“We are thrilled to see it take strong pro-innovation approach to this nascent technology,” CoinCenter, a Washington D.C.-based non-profit, said in a press release. “With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.”
CoinCenter added, “There are two cases in which we believe securities treatment is reasonable, (1) promises to deliver a future token to investors and (2) tokens that represent specific contracted-for rights to profits from a developer’s efforts.”
Zachary Fallon, a former SEC lawyer and blockchain advisor, also praised the decision.
“Hinman’s statement on Ether’s status as a non-security in particular is important as a concrete example of the ways in which a digital asset that potentially entered the market as a security can transform through decentralization into something very different,” he said in an email to Business Insider.
“Credit to Director Hinman and the staff of the Division for continuing to keep an open mind and express a willingness to think progressively about this technology and its interaction with the federal securities laws.”