Ether is not a security

JUNE 18TH, 2018

Last week, a top official from the SEC opined on what the crypto-verse had been waiting to hear from the SEC since the beginning of the ICO boom in early 2017.

According to Bloomberg:

“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, who heads the Securities and Exchange Commission’s division of corporation finance, said in remarks prepared for a Yahoo Finance conference 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.”

This seems to indicate that the SEC believes that while the ETH token was used to raise money, it has reached a point in its development at which it does not resemble a security and does not require SEC oversight.

The statement went on to say that:

“This also points the way to when a digital asset transaction may no longer represent a security offering. If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful. 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 is particularly interesting because it is the first time the SEC has displayed an understanding of the inherently difficult (impossible?) proposition of requiring decentralized networks to make disclosures and follow a traditional path towards SEC compliance. It's also important in that it addresses that there may be other tokens and coins outside of ETH and BTC that similarly fall outside of the purview of the SEC.

All in all, this is a good thing for crypto. It is clear that the SEC is trying understand crypto networks, and not simply force them into antiquated regulatory paradigms. A fresh SEC framework would allow for light-touch regulation of the industry without stifling innovation, while cracking down on bad-actors that give the industry as a whole a bad reputation.