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What the SEC Ethereum ruling means, in plain english

The US Securities and Exchange Commission has confirmed that neither Bitcoin nor Ethereum represent securities – but what does really mean? We explore the ruling’s impact on cryptocurrencies and ICOs.

Written by Bryan Smith Published on

Earlier today, the US SEC officially clarified its position on Ethereum and Bitcoin – in an address, SEC Corporate Finance Division head William Hinman has confirmed that neither Bitcoin, nor Ethereum, represent securities.

Speaking at the Yahoo Finance All Market Summit: Crypto in San Francisco, Hinman offered that “…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.”

While Hinman clarified that the SEC has no intention to update its definition of securities to include Bitcoin (or any other cryptocurrency), the spokesman clarified that the manner in which a token is sold, what it promises, or how it behaves is more fundamental to its definition as a utility or a security.

During his address, Hinman pushed back on the idea that utility and security tokens were binary concepts – expressing that “even digital assets with 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.”

The ruling is significant for a number of reasons – most prominently, certain ICOs (initial coin offerings) are not open to US investors thanks to securities laws which would impose onerous regulatory requirements.

Speaking broadly on the ICO ecosystem, Hinman explained that fraud is still a paramount concern for the SEC – noting that “there is excitement and a great deal of speculative interest around this new technology. Unfortunately, there also are cases of fraud.”

Notably, however, the SEC has refreshed its view and has expressed its openness to working with ICOs and new token projects to more accurately define the extent and nature of a proposed offering. As Hinman stated, “…we stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use.”

The news has been met with open arms – the price of Bitcoin and Ethereum have both rallied by 1.71% and 4.29% respectively, where Bitcoin trades at $6,617 USD, and Ethereum at $508.27 USD.

What repercussions can we expect?

Broadly, the clarification that neither Bitcoin nor Ethereum are securities could serve to bolster market confidence in the US and abroad. The fact that neither cryptocurrency represents a security means that US investors will not need to be accredited to purchase either Bitcoin or Ethereum.

While cryptocurrency exchanges will still need to comply with the SEC’s guidelines and implement KYC (Know Your Customer) and AML (Anti-Money Laundering) measures adequately, cryptocurrency investors will remain able to invest or trade Bitcoin or Ether without foreseeable fear of regulation unhinging their activities.

Within the ICO space, matters are perhaps left more complicated.

With the clarification that even utility tokens designed to facilitate exchanges within platforms can be deemed securities, the definition as to whether new ICOs represent securities themselves are far less clear-cut.

Essentially, while Ethereum might not be considered a security, tokens exchanged on the Ethereum network may be.

ICO conveners will now need to tread carefully and engage with the SEC to ensure that they are not offering a security, and do not fall foul of securities laws. Those that are deemed to be offering a security will need to ensure that they market their offerings to accredited US-based investors.

The news may mean that Ethereum ICOs either begin to withdraw more fully from US markets in a bid to avoid compromising securities laws, or might debut at a far slower pace to engage with the SEC.

Up until now, the SEC’s blitzkrieg in the opening months of 2018 has defined the operation of several ICOs. Kodak’s KodakOne platform delayed its operations to properly accredit investors, while Stream – another ICO – suspended its operations to consult with the SEC.

A future likelihood might involve the SEC offering clear definitions as to what forms of network tokens might represent securities as well as advertising guidelines. One such measure has already been proposed in Malta, where financial regulators have proposed the Financial Instruments Test.

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Written by

South African technology journalist, podcaster, photographer and filmmaker. Hodling - BTC, NEO, ETH.@bryansmithsa

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