‘Ethereum is Not a Security’, Said the Pied Piper of Hamelin

By March 12, 2019 Ethereum
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‘Ethereum is Not a Security’, Said the Pied Piper of Hamelin

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SEC Chairman, Jay Clayton had sent an official letter to the United States Representative, Ted Budd regarding the ‘application of federal securities to digital assets.’ The uncertainty over cryptocurrencies being classified as investment security has kept the minds at SEC occupied from a long time.

For SEC, Investor’s Security Comes First

Meanwhile, Clayton noted that the SEC has successfully curbed down on the illegal and immoral ICOs that was prevalent during 2016-2017.

The Divisions of Corporation Finance, Investment Management, and Trading and Markets had issued a statement in November 2018

The Commission has brought a number of actions involving offerings of digital asset securities. To date, these actions have principally focused on two important questions.

First, when is a digital asset a “security” for purposes of the federal securities laws? Second, if a digital asset is a security, what Commission registration requirements apply.

Jay Clayton reaffirmed in the letter that thorough analysis of a digital currency or asset will be made by the Departments at the SEC.

—regardless of the terminology used to identify the digital asset—will depend on the facts and circumstances, including the economic realities of the transaction.

Conditions To Not Being Classified As a Security

The necessary and sufficient condition for any digital asset to ‘not’ be classified as ‘security’ is its autonomy and decentralization. The hopes of the token holder must reside with the efforts of the entire community and not with a particular set of people.

Clayton mentioned that digital currency’s definition as a particular asset class could change with time. Therefore, a cryptocurrency released as ‘security’ can later be exempted from the Securities Exchange Act after it achieves autonomy.

In the letter he said,

I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.

Hence, when the conditions are applied on Ethereum, the following can be proposed:
Ethereum has achieved a high level of decentralization through a fair and open distribution of Ether (ETH) tokens. However, the hopes of the Ether (ETH) holder currently reside with the Ethereum Foundation’s successful implementation of the Serenity Update. The expectations of the token holders rest with Vitalik Buterin and the Ethereum Foundation. Therefore, Ethereum might still be classified under ‘security.’

The cryptocurrency media publications have announced that ‘Ethereum is not a security.‘ However, a clarification came from the Executive Director of CoinCenter who clarified that the headline was not appropriate. The publication has confirmed on changing their title.

Some folks interpreted the headline on my post earlier today to mean Clayton said explicitly that ether is not a security. Not what we meant and have changed headline accordingly. He agrees with Hinman’s method of applying Howey (which concluded ether today is not a security).

— Jerry Brito (@jerrybrito) March 12, 2019

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