Ether Not A Security: Why SEC’s Announcement Could Boost Cryptocurrency Growth


By David Drake

Ethereum network has played a significant role in the growth of the cryptocurrency market. As the network on which the digital currency, ether, runs, Ethereum provides a platform for developers to create decentralized applications.

Earlier this year, there was uncertainty among crypto-developers when the Securities and Exchange Commission (SEC) through its Chairman, said tokens and digital assets would be considered as securities. Ether was originally offered as an initial coin offering (ICO) but has since been highly decentralized.

The statement by SEC’s director of corporate finance, Mr. William Hinman has clarified that the digital currency is not a security. This means it would not be regulated the same way the SEC regulates corporate bonds and stocks. The main reason for not classifying ether as a security is the fact that it functions in a way similar to commodities such as gold, due to its high decentralization.

Clarity in classification

Taking into account the number of apps that run on the Ethereum network, there is no doubt the clarification offered by the SEC will boost growth in the cryptocurrency industry.

According to Denis Farnosov, founder and CEO of AlfaToken:

“This announcement should produce growth by reducing the level of uncertainty in the cryptocurrency development community. The threat of being classified as a security by the SEC heightened concerns about potential lawsuits and seizures. It was negative for developers and potential investors. This new statement provides a more clear path since decentralization and utility are key core elements of many of the blockchain projects being developed including AlfaToken. As a decentralized cryptofinance marketplace we believe this is good news.”

On his part, Manuel López, the general coordinator at WorkChain Centers, says: “With this statement, Hinman gives more clarity on which crypto activities will enter this category, stating that ‘its name is not important, but the way it sells, promises and behaves is the decisive factor’. In his presentation Hinman commented that, although bitcoin and ether initially would have been sold as securities, and would have required in due time to register with the SEC, the Commission has agreed that these cryptocurrencies behave and are treated as commodities, similar to gold and oil.”

Lopez further proceeds to highlight another factor that the SEC seems to look at in determining whether digital assets are securities as the level of decentralization.

“Hinman said that the cryptocurrency (ether) is sufficiently decentralized, where its buyers do not expect an administration of the same by a third party that issues them. This means  the cryptocurrency is not a value. He added that the fact that an investment opportunity is labeled as ‘cryptocurrency’ or ‘token’ does not exempt it from being a value.”

Lowering tension

The SEC’s announcement that ether is not a security has removed tension in an industry that has experienced regulatory uncertainty since January this year. In the month of February, the SEC subpoenaed some 80 ICO companies in what appeared to be a major crackdown on the industry.

“These statements have alleviated tension from several Ethereum investors. If there was a possibility that ether has declared a value, they would have been obliged to comply with the corresponding regulations. The effect of this can be observed in the market because immediately the announcement was made, the value of ether experienced an increase in price of more than 10% after a week of losses in the market,” Lopez adds.

Amidst all the excitement in the market, Reginald Ringgold, founder of BlockVest has raised concerns on how lately, the SEC has been recanting several of its statements. He says: “The SEC has been recanting their statements a lot lately. They reversed their stance on Ethereum being a security, they also recently reversed an old law so the new law orders the SEC to change the rules to permit reporting companies to utilize Reg A+.”

Agreeing with Ringgold’s sentiments, Alex Karasulu, CTO and Founder of OptDyn feels that beyond Hinman’s statement, the SEC may be sending a strong enforcement message to the industry.

“There’s been contradictory, good cop, bad cop, commentary coming out across different high ranking officials at the SEC within days of each other. Looking deeper, a clear pragmatic enforcement message appears in Director Hinman’s good cop comment coupled with Chairman Clayton’s bad cop comment just days before.”

Further, Ringgold adds that: “This second step allows an issuer to include non-accredited investors in the offering. More importantly, by utilizing Regulation A+, or a fully registered offering, the investors will receive securities (e.g. tokens) available for immediate resale under federal law, compared to the 12-month holding period under Regulation D for private company offerings.”

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.