The U.S. Securities and Exchange Commission (SEC) has declared that Ethereum (ETH) is not a security under U.S. securities law as it is a decentralized structure that is not controlled by any committed third party.
SEC Backs Decentralized Coins
Speaking at the Yahoo All Markets Summit: Crypto conference in San Francisco, the finance head said that the key issue is how the asset is sold and the ‘expectations of purchasers.’ At the time of publishing, Ethereum is trading at $518, according to CoinMarketCap, up by 9.59 percent in 24 hours.
William Hinman, head of the Division of Corporation Finance at the SEC, said that U.S. securities law will not apply to Ethereum as a tradable commodity because of its decentralization. This acknowledges that it was originally sold in an initial coin offering (ICO), but that it is not controlled by any committed third party who is giving investors an expectation of future value increase.
Hinman said: “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 a group is going to carry out a central, managerial or entrepreneurial effort, those assets might not represent a securities contract.”
“Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network is a decentralized structure. We believe that the current offers and sales of Ether are not security transactions.”
He highlighted other laws that do apply to companies that issue tokens, including know-your-customer (KYC) and anti-money laundering (AML) laws. He also said that investor contracts that involve Bitcoin could be classed as a security if they meet certain requirements or offer a future increase in value.
Paying attention to the simple agreement for future tokens (SAFT), he said that they are likely to ‘retain the characteristics of a security for some time.’ He conceded that some digital aspects may be able to be resold as a non-securities transaction, but that it depends on individual circumstances.
SEC Reiterates Bitcoin is Not a Security
Following comments by Jay Clayton, the chair of the SEC, where he clarified that Bitcoin is not a security, Hinman highlighted that it is decentralized and may have been since it was created. Unlike Ethereum, there was no ICO for Bitcoin.
Hinman said: “When I look at Bitcoin today, I don’t see a central third party who’s efforts are a key factor in determining the success of that enterprise. The network that Bitcoin functions is operational, appears to have been decentralized for some time, perhaps since inception.”
This raises questions over Ripple’s (XRP) status as a security or not. Hinman said that Ethereum is not a security because there is no third party committed to carrying out a managerial effort. Ripple, on the other hand, own the majority of XRP, are committed to it as a business and provide an institutional solution called xRapid that uses it. On May 5, Ripple was hit with a lawsuit for allegedly violating securities law.