Earlier this week, the entire cryptocurrency community was abuzz with news surrounding Ethereum [ETH], the second largest cryptocurrency by market cap. It was reported that Jay Clayton, the Chairman of U.S. Securities and Exchanges Commission, deemed ether wasn’t a security. However, this was not the reality as the Chairman only agreed to a few statements made by William Hinman, the Director of Corporate Finance – SEC, from back in 2018.
The news broke out following a report published by Coin Center, a leading non-profit research and cryptocurrency advocacy group. With an intention to get more clarification, the team along with US House of Representatives member Ted Budd, reached out to the Chairman via a letter signed by several colleagues, with respect to whether basis tokens were classified as securities.
The letter, in total, had three questions pertaining to the tokens being classified as securities. One of these questions was whether Jay Clayton agreed with the statements made by Hinman.
In particular, he was asked whether a token can be analyzed separately from the original purchase agreement, even if it can clearly be classified as an investment contract. If it is, then could the token be classified as a non-security under this circumstance?
In a letter addressing these questions, Clayton agreed with the “analysis of whether a digital asset is offered or sold as security is not static and does not strictly inhere to the instrument”. He stated that a token can be offered/ sold as a security because it meets the terms of investment contract. However, its designation could be subject to change if it did not meet the definition over time.
“I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract, if for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial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.”
The “Ether is not a security” story
Even though Jay Clayton did not specifically mention Ether or any other token in the return letter, news of his ‘agreement’ spread across the cryptocurrency space. This was mainly because Clayton agreed to Hinman’s explanation on tokens being classified as securities and non-securities. In his explanation, he quoted Ether for a token that could have been classified as a security in the beginning, but may no longer be, resulting in several members believing the notion that Clayton also considers Ether to be a non-security.
He had said,
“And 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.”