The SEC’s leader on cryptocurrencies and initial coin offerings (ICOs) says that Bitcoin and Ether are not securities but that many, not all, ICOs are securities and will come under the regulatory control of the SEC.
“Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers,” William Hinman, head of the Division of Corporate Finance for the SEC.
Hinman noted that the central issue in determining whether cryptocurrencies and ICOs were securities was the expectation of a return by a third party, specifically whether there was a person or group that sponsored the creation and sale of the asset, and who played a significant role in its development and maintenance. If consumers are promised or are respecting an appreciation in value, and there is a centralized third party, then it can be classified as security according to Hinman.
Hinman specifically said that Bitcoin is not a security because it is decentralized: there is no central party whose efforts are a critical determining factor in the enterprise. Likewise, Ethereum cannot be considered a security because the Ethereum network is decentralized.
Mr. Hinman did not address the securities status of other cryptocurrencies, like Ripple (XRP), which is on the wrong end of a lawsuit alleging that it is a security. Additionally, a platform like EOS, which is controlled by Block.one, seems to be a likely contender for securities regulations. EOS’s system of validation, which delegates power to only 21 nodes, may not be enough decentralization in the eyes of the Securities and Exchange Commission.
Investors have eagerly been awaiting this decision, and we can all breathe a sigh of relief that the SEC continues to favor fair regulation and encourage innovation. Security regulations in the US are stringent and a securities label could remove many US investors from the global crypto market.