The US Securities and Exchange Commission (SEC) Director of Corporate Finance William Hinman, speaking at the All Market Summit: Crypto in San Francisco, said that neither bitcoin nor ether would be classified as securities by the SEC. Hinman said, “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.”
He also said, “Let me emphasize an earlier point: simply labeling a digital asset a ‘utility token‘ does not turn the asset into something that is not a security.”
Hinman indicated that the primary issues in determining the security status of a cryptocurrency or initial coin offering (ICO) was “the expectation of return by a third party, specifically whether there was a person or group that sponsored the creation and sale of the assets, and who played a significant role in its development and maintenance.” Hinman said that the existence of a centralized third party, as well as purchasers who have the expectation of a return, acts as an indicator that it is most likely a security. He indicated that “form is disregarded for substance” to the SEC saying that economic realities are more important than the label.
According to Hinman, bitcoin is not a security due to its decentralized nature. Ether also falls into not-a-security status because the Ethereum network is also decentralized. Hinman said that the SEC “doesn’t see a lot of value in treating ether today as a security,” and that the “assets may not represent an investment contract.” Hinman did not discuss the securities status of other cryptocurrencies, but did indicate that eventually, there may be less need for oversight on decentralized networks, saying, “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.”
Hinman spoke about ICOs, saying that some digital assets might be structured more like a consumer item – such as investments in a club membership – would not be considered securities since the purchase intent was for personal use and could not be considered an investment. He cautioned that, “the analysis of whether something is a security is not static and does not strictly inhere to the instrument.” Perhaps most interestingly, Hinnman seemed to confirm that it would be possible an for a digital asset to change its status. He was quoted: “Can a digital asset originally sold in a securities offering eventually be sold in something other than a security?” How about cases when there’s no longer a company [involved]? I believe in those cases [the] answer is a qualified yes.” This is the fist step in recognizing that digital-assets are so radically different than financial instruments of the past, that old methodologies and legal principals may simply no longer apply.
Hinman’s statements echo what SEC Chairman Jay Clayton has said in the past, including a statement made before Congress in April 2018 where Clayton said that the SEC doesn’t consider bitcoin a security, saying that it was “a replacement for currency that has been determined by most people to not be a security.” As ether is used in the same manner as bitcoin, it stood to reason that the SEC would eventually also declare that ether was not a security.
Hinman did defend the SEC’s interpretation of existing securities laws, saying, “There is excitement and a great deal of speculative interest around this new technology. Unfortunately, there also are cases of fraud.” The fraud factor, and ultimately, consumer protection has been important for regulators to consider as they’ve assessed their approach towards regulation of cryptocurrency markets.
Washington DC-based think tank Coin Center told The Verge: ““We are glad the SEC agrees with our long held analysis of how securities law applies to decentralized cryptocurrency networks like Bitcoin and Ethereum. With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.”