Recent information from the U.S. Securities and Exchange Commission’s (SEC) chairman has come out on the topic of ethereum (ETH) as a security.
Jay Clayton, the SEC’s chairman, verified the agency’s staff examination discovered ETH as free from classification as a security, as detailed in a report from Coin Center.
Hinman’s 2018 comments
Last year, the SEC’s comments on ETH’s security status left room for discussion. In July of 2018, a report from Coin Center detailed statements from SEC director of corporate finance, William Hinman on the topic. “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,” Hinman said in a speech.
SEC brings clarity in 2019
On March 12, 2019, Coin Center released a report based on its search for clarity regarding the ETH-security subject. Coin Center noted it was unclear whether last year’s speech from Hinman revealed the SEC’s position on the matter, or if it was simply SEC staff opinion.
Seeking clarity, Coin Center, in collaboration with Representative Ted Budd, directed a letter to Clayton inquiring about the matter. The letter also received multiple signatures from several of Clayton’s colleagues, Coin Center added.
Clayton responded with a letter of further clarity. Clayton said the SEC looks toward the Securities Act of 1933, the Securities Exchange Act of 1934 and multiple case law tests, such as the Howey test for example, on these matters. The Chairman referenced the DAO token case as an example of the Commission’s previous testing and conclusions. He also pointed toward other statements and initial coin offering (ICO) clarifications.
Clayton then went on to respond to the letter from Coin Center and Ted Budd inquiring on Clayton’s agreement with aspects of Hinman’s speech.
I agree that the analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument. A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition. I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.
Clayton also pointed out the SEC’s endeavors into helping the public navigate through the industry, such its FinHub initiative, as well as various educational resources. Clayton additionally noted the SEC’s continued pursuit to enforce laws and regulations in the space and its watch for violators and fraudulent players.