Statement of SEC chairman Clayton
Jay Clayton, chair of the SEC said: “Cryptocurrencies: These are replacements for sovereign currencies, replace the dollar, the euro, the yen with bitcoin. That type of currency is not a security.” No doubt many in the crypto coin area hope that some of their coins will replace fiat money but so far this has not happened on any large scale. Few places accept payment in crypto and the volatility in price of the coins a make them unattractive as an alternative.
Clayton also argues that when the network on which a coin or token operates is sufficiently decentralized the assets may not represent an investment contract. Also, when the efforts of a third party are no longer a key factor in determining the success of an enterprise, material information asymmetries, as one has with securities, recede. As a system becomes decentralized trying to identify an issuer or promoter is difficult and has less meaning.
Clayton appears to hold that neither bitcoin nor ethereum should be regarded as securities: “The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception. Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value… And putting aside the fund raising 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.”
The general view appears to be that ICO’s are definitely securities but cryptocurrencies at least bitcoin and ethereum are not.
The view of the SEC director of corporate finance
The SEC director of corporate finance, William Hinman has a view similar to that of Clayton. Hinman said that ether the coin associated with etherium was not a security and thus was out of the purview of US securities law.
At the Yahoo Finance All Markets Summit in San Francisco the other day, 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. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.”
Hinman did not claim that no cryptocoins were securities. He suggested that whether or not they were depended on the degree to which they were decentralized. If the network on which the coin function is sufficiently decentralized then one no longer expects a person or group to carry out essential managerial or entrepreneurial functions.
Hinman said that to classify an asset as a security in the end comes down to its use and is always subject to change. He warned that those who argue that a crypto coin is not a security by labelling it as a utility token does not show that it is not a security as Supreme court cases have shown.
Hinman also cautioned that though bitcoin and ethereum are not currently classified as securities consumers could use them as such: “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.”
