U.S. SEC ruled that Ethereum's Ether and Bitcoin are not security, but token running on top of Ethereum could be

U.S. SEC ruled that Ethereum's Ether and Bitcoin are not security, but token running on top of Ethereum could be

Ethereum is one of the largest blockchain networks after Bitcoin. While the purpose of Bitcoin (BTC) is sole general-purpose cryptocurrency, Ethereum blockchain serves as a platform that enables smart-contracts for different utility functions. It is the major enabler of Initial Coin Offerings (ICO) and innovations at different levels in the blockchain. The Ethereum's network functions are compensated by its own cryptocurrencies called Ether (ETH) and GAS. Ether is by far second largest cryptocurrency in terms of the market cap after Bitcoin.

Snip from CoinMarketCap.com

At Yahoo Finance’ All Markets Summit: Crypto, William Hinman, a senior official at the U.S. Securities and Exchange Commission clarified that ethereum cryptocurrency, Ether (ETH) is not a security. However, the tokens created on top of the blockchain network may or may not be termed as security.

To decipher crux of the speech, if the digital asset represents a set of rights that gives the holder a financial interest in an enterprise then it can be called as securities. Later terming the transaction as an initial coin offering, or “ICO,” or a sale of a “token,” will not take it out of the purview of the U.S. securities laws.

"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. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value. 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. And of course, there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins." said William Hinman, director of the SEC’s division of corporation finance.

This speech also offered insights into what can be termed as security.

"Even digital assets with the utility that function solely as a means of exchange in a decentralized network could be packaged and sold as an investment strategy that can be a security. If a promoter were to place Bitcoin in a fund or trust and sell interests, it would create a new security. Similarly, investment contracts can be made out of virtually any asset (including virtual assets), provided the investor is reasonably expecting profits from the promoter’s efforts", he said at the summit in San Francisco.

This description of security would create some confusion as the tokens released on top of Ethereum blockchain could end up classified as a security.

Over past year, every country and their governments were trying to regulate cryptocurrencies. This has caused a lot of volatility in terms of crypto valuations of different cryptocurrencies.

However, this speech had an immediate effect on the prices of cryptocurrencies, mostly upwards.

The text transcript of the speech is available here.
All Markets Summit: Crypto video is available here.


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Mandar is a seasoned software professional for more than a decade. He is Cloud, AI, IoT, Blockchain and Fintech enthusiast. He writes to benefit others from his experiences. His overall goal is to help people learn about the Cloud, AI, IoT, Blockchain and Fintech and the effects they will have economically and socially in the future.

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