Newsflash: SEC Chief Confirms Analysis That Ethereum isn’t a Security
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Securities and Exchange Commission Chairman Jay Clayton has formally confirmed existing staff analysis that Ethereum and other similar decentralized cryptocurrency assets are not securities, even if they were initially sold through an illegal securities offering.
SEC Chairman Agrees with Analysis That Says Ethereum, Similar Crypto Assets are Not Securities
Clayton made this revelation in a letter sent to US House Rep. Ted Budd, who had requested that the SEC provide clarity on whether SEC Director of the Division of Corporate Finance William Hinman spoke for the agency when he said that Ethereum was not a security or was merely voicing his own opinion.
While Clayton did not reference Ethereum or any other cryptocurrency by name, he confirmed that he agrees with Hinman’s analysis of what crypto assets fall under the securities classification.
In a key section he writes:
- “Your letter also asks whether I agree with certain statements concerning digital tokens in Director Hinman’s June 2018 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 I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial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.”
Regulatory Clarity Could Spur Institutional Adoption
Hinman had said in 2018 that a crypto asset like Ethereum, which was initially distributed through a sort of initial coin offering (ICO), may have been a security when it was first issued. However, over time the cryptocurrency became sufficiently decentralized following the network’s launch as, among other factors, new currency units came to be introduced through mining rather than a token sale.
However, until now it was never fully clear whether Hinman was communicating official SEC policy or his own personal views. Previously, Clayton had said that he did not consider Bitcoin a security, but he had declined to address other assets, including Ethereum.
The distinction is crucial. A securities classification would have likely seen Ethereum booted from US cryptocurrency exchanges, and the SEC previously warned that exchanges that list illegal securities could themselves faces repercussions.
This increased regulatory clarity could further help spur institutional adoption, as questions surrounding cryptocurrencies’ legal status has been identified as one of several roadblocks to convincing more institutions to become active in the crypto space.
Crypto Lawyer Marco Santori: Not So Fast
Still, crypto lawyer and Blockchain President & CLO Marco Santori warned crypto enthusiasts against reading too deeply into Clayton’s letter.
Drawing attention to the fact that the SEC Chairman repeatedly said that he agreed with Hinman’s analytical model but did not address his specific application of that model, Santori said that to state outright that Ethereum was not a security in a letter to Congress “would be construed as legally binding, and the SEC isn’t trying to have that.”
That said, he speculated that the letter seems to indicate that the SEC is not taking the position that Ethereum is a security, even if the agency is not taking the position that it isn’t a security.