SEC: ether and bitcoin are not securities
Determining whether a security is being offered relates to how it’s sold and the expectation of purchasers.
The United States Securities and Exchange Commission (SEC) has officially confirmed that cryptocurrencies bitcoin and ether are not recognized as securities under federal government regulations.
During his speech at Yahoo Finance’s All Market Summit: Crypto in San Francisco this week, SEC director of corporate finance William Hinman backed SEC chairman Jay Clayton’s previous commentary that the regulator would not be changing its definition of a security to include cryptocurrencies.
“Some of the industry participants are beginning to realise that in many cases, it could be easier to start a blockchain-based enterprise in a more conventional way… They recognize the value of structuring things in phases. With phase one being done as an offering on a more conventional basis,” Hinman told the audience.
“Once that funding allows the network to get up and running, then distribute or offer blockchain tokens or coins to participants who need the functionality that the network and the digital assets offer.
“This allows the tokens and the coins to be structured and offered in a way where it’s then more evident that the purchasers are not making an investment in the development of an enterprise. In other words, it’s easier to make the case that the token, at that phase, is not a security.”
In the case of initial coin offerings (ICOs), it’s important to understand how digital assets are being sold.
“Returning to ICO’s that we are seeing, strictly speaking, the token, the coin, whatever the digital information packet is being called… all by itself we don’t think it’s a security,” Hinman said. “Determining whether a security is being offered, however, is how it’s being sold and the reasonable expectation of purchasers.”
In an interview with CNBC this month, SEC chair Jay Clayton said tokens that act as digital assets are securities.
“A digital asset itself is simply code but the way in which it’s sold as part of an investment to non-users by promoters to develop an enterprise can be and to that extent, most often is, a security,” Hinman added.
“If the network on which the token or coin is to function is sufficiently decentralized and the purchasers no longer have a reasonable expectation that a person or group is going to carry out essential managerial or entrepreneurial efforts, those assets might not represent an investment contract.”
“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 functions is operational, peers 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,” Hinman said.
“Moreover, putting aside the fundraising that accompanied the creation of ether, based on my understanding on the present state of ether, the Ethereum network, it’s decentralized structure, we believe current offers and sales of ether are not securities transactions.”
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