THE WORLD'S SECOND-MOST popular cryptocurrency isn't
an investment vehicle, at least according to the Securities and Exchange
Commission. William Hinman, the agency's director of the division of corporate
finance, said Thursday that ether—the currency that powers
network—shouldn't be regulated in the same way as stocks and bonds.
His statements follow similar ones made in April by SEC chair Jay Clayton about bitcoin.
Taken together, the two sets of remarks provide the clearest understanding of
how the regulatory agency views the cryptocurrency market. In essence, when a
cryptocurrency becomes sufficiently decentralized, as the widely popular
bitcoin and ether have, the agency no longer views it as a security. In
contrast, smaller initial coin offerings, or ICOs, are almost always
securities in the SEC's eyes. That distinction matters, because securities are
subject to the same regulations as normal stocks.
“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,” Hinman said at Yahoo's All
Market Summit: Crypto in San Francisco. "And, as with
bitcoin, applying the disclosure regime of the federal securities laws to
current transactions in ether would seem to add little value."
Joe Lubin, a cofounder of Ethereum and the founder of
CosenSys, a major Ethereum application company, says he is grateful for the
SEC's decision. "We applaud the clarity provided by Director Hinman and
the SEC today," Lubin said in a statement. "Ether and other
next-generation consumer utility tokens will continue evolving the web towards
networks that are more fair, secure, and evenly distributed. ConsenSys looks
forward to continuing to engage with regulators around the globe to promote
responsible adoption of this transformative technology."
Hundreds of different developers run applications on top of
the Ethereum network and contribute to its code. A similar number, if not more,
help to develop Bitcoin. "The network and the software development is
sufficiently decentralized that there isn't a discernible third party upon whom
we would really expect investors to be reliant," says Peter Van
Valkenburgh, the director of research at Coin Center, a think tank focused on policy issues facing
blockchain technology. That's an important distinction from traditional
securities, like Apple or Microsoft stock, in which you're betting on a
specific company's efforts to develop products and services and generate income.
The SEC's Hinman notably stopped short of declaring that
the initial investments made in ether weren't securities. It's possible that
investments made early, before the currency became truly decentralized, could
still be viewed as traditional investment vehicles. "The director was
pretty clear to not be definitive about that activity," says Van
Valkenberg, who also suggests that this indicates the people who got in
first—and have likely made the most money—could someday face regulation.
Hinman also said that other cryptocurrencies may become
"sufficiently decentralized" in the future, to the point where
"regulating the tokens or coins that function on them as securities may
not be required." But this doesn't mean all cryptocurrencies can evade
scrutiny from US regulators. The SEC has held that most so-called token sales
and ICOs are likely subject to regulation, because they generally power a
single startup's product or application. ICOs are opportunities for investors
to purchase the tokens that power a blockchain startup, typically before its
product has gone live.
Complicating the issue: Many tokens run on top of
the Ethereum network itself. So while buying and trading ether is not seen as
making a traditional investment, buying and selling specific tokens that run on
top of that network would be.
The SEC has ramped up its enforcement efforts against fraudulent
ICO schemes in recent months. In December, the agency's new
cyber unit announced it had filed its first ever complaint, against the cryptocurrency
PlexCorps, for allegedly swindling customers out of $15 million. A month later,
it halted one of the largest ICOs ever, for the Dallas-based
This doesn't mean all cryptocurrencies can evade scrutiny
from US regulators.
In February, the SEC told the Senate's Committee on Banking, Housing, and Urban
Affairs that it was open to "exploring with Congress, as well as our
federal and state colleagues," whether to regulate cryptocurrency
exchanges, websites that allow customers to convert and trade different coins
for a fee.
And then in April, the agency charged the two founders behind an ICO that raised over $32
million, for allegedly selling fraudulent and unregistered investments. The
scheme had received endorsements from professional boxer Floyd Mayweather and
music producer DJ Khaled.
Owners of bitcoin and ether, however, now appear safe from
that sort of close scrutiny. That doesn't mean that investing in either
cryptocurrency is necessarily safer. Researchers at the University of Texas
found that a price manipulation campaign may have partially accounted
for an increase in bitcoin's price last year, for example. All that the SEC's
declarations really say is that you're betting on an entire ecosystem, rather
any one player.
Predictably though, both ether and bitcoin prices spiked
Thursday, likely in response to the news.
for the original article from Wired.