Bitcoin and Ether are not securities, the SEC’s director of corporate finance, William Hinman, stated on June 14. This is because these cryptos lack a central third party whose efforts are key in determining their success. Hinman went on to state that over time, there may be other sufficiently decentralized networks and systems which will not need to be regulated as securities. This puts an end to the long-running question of whether the most valuable altcoin would be categorized as a security or not, an issue that could have had a far-reaching effect on not just the Ethereum network but the crypto industry as well.
Ether in the Clear
Hinman explained why, in his view, Bitcoin is not a security:
So, when I look at Bitcoin today, I don’t see a central third party whose efforts are a key factor in determining the success of that enterprise. The network on which Bitcoin operates appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value.
Notwithstanding the fundraising process that accompanied the creation of Ether, he also views it as sufficiently decentralized and therefore not a security. In the past, the SEC had dropped hints that Ether might be classified as a security, an issue that the Ethereum community refuted incessantly. Had Ether been classified as a security, it would have become harder to trade, as most crypto exchanges are not licensed to trade securities.
Hinman, who was speaking at the Yahoo All Markets Summit held on June 14 in San Francisco, also pointed out that other networks that prove to be sufficiently decentralized in the future will also be exempted from securities laws. These laws exist to remove information asymmetries between promoters and investors, Hinman explained, and promoters are liable for misstatements in their offering materials.
However, if an investor expects the entrepreneurial and managerial efforts of a third party to affect an enterprise’s success, then that asset is categorized as a security. A lot of the ICOs that the SEC has reviewed fall under this category, Hinman noted.
Financial institutions must continue to apply all the requisite federal requirements when dealing with cryptocurrencies. Anti-money laundering rules, Know Your Customer rules, the Commodities Exchange Act, and other federal rules must be adhered to.
The classification is, however, not static, and may change depending on specific applications, Hinman explained.
So, when digital assets with utility [that]function solely as a means of exchange on a decentralized network are repackaged and sold as part of an investment strategy, that could be a security. For example, if a promoter were to place Bitcoin in a fund or trust and sell interest, that would probably be a security.
Hinman concluded his speech by reiterating the SEC’s commitment to helping ICO issuers and other market participants understand whether particular digital assets qualify as securities in certain uses. He also stated that in some cases, a digital asset sold once as a security may change its status to a non-security.
Hinman’s speech left out XRP, the third-largest crypto by market cap, which has also been at the center of the securities debate. While it was expected that both Ether and XRP would together be absolved of the securities tag, Hinman only spoke about Ether and Bitcoin. This has fueled speculation that XRP might be classified as a security, especially given its unique ties with Ripple, a centralized software solutions provider.