SEC Official: Ethereum and Bitcoin are Not Securities, but Many ICO Tokens Are
During the last couple of weeks, the Securities Exchange Commission has made many moves towards cryptocurrency regulation, backed by numerous statements. For instance, recent reports indicate that a SEC representative confirmed that bitcoin and Ethereum are not securities, yet many of the tokens coming from Initial Coin Offerings are in fact, securities.
In a recent press statement, held at the Yahoo All Markets Crypto Summit in San Francisco, William Hinman, who is the chief of the Division of Corporation Finance over at the SEC, mentioned that: "Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers."
According to Hinman, the primary issue worth taking into consideration when determining whether ICO tokens or digital currencies are securities, consist in whether there is an investment return expectation provided by a third party. In this case, the 3rd party consists of the person, company or group sponsoring the development and sale of the asset. With this in mind, if the token is provided by a centralized third party while also granting an expectation of ROI, then the token is most likely a security.
In other words, decentralization serves as one of the key elements that differentiate securities from digital currencies. As long as there is no central party who takes decisions within an enterprise, coins are not bound by securities legislation. Such is the case with both bitcoin and Ethereum.
Unfortunately, Hinman did not address the securities status of other prominent digital currencies, such as Ripple (XRP), which happens to be centralized. According to him, however, "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."
On an end note, speaking of ICOs, some of the tokens, despite being centralised, may be designed to serve as a consumer item, especially if it only grants utility for personal use. Lastly, Hinman reiterated the SEC’s mission of protecting the speculative market, and dealing with fraud attempts. At this time, there is no clear set of rules that can be applied to determine the legal status of a digital asset.