Top Two Cryptocurrencies, Ether and Bitcoin, Aren't Investment Vehicles According to the SECRecent remarks made by William Hinman, the Securities and Exchange Commission's director of the division of corporate finance, and SEC chair Jay Clayton, provide a clear understanding of how the regulatory agency views the crypto industry.
Because of bitcoin and ether’s scale and the decentralized nature of cryptocurrency, the SEC’s view is essentially that they shouldn't be regulated in the same way as stocks and bonds.
"Sufficiently decentralized” cryptocurrencies won’t be regulated as securities
As reported by WIRED:
In essence, when a cryptocurrency becomes sufficiently decentralized, as the widely popular bitcoin and ether have, the agency no longer views it as a security. In contrast, smaller initial coin offerings, or ICOs, are almost always securities in the SEC's eyes. That distinction matters, because securities are subject to the same regulations as normal stocks.
WIRED also reported that at Yahoo’s All Market Summit: Crypto, 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.
In April, Coin Center reported that in a hearing before the House Appropriations Committee, SEC Chairman Jay Clayton said that:
...there are different types of cryptoassets. Let me try and divide them into two areas. A pure medium of exchange, the one that's most often cited, is Bitcoin. As a replacement for currency, that has been determined by most people to not be a security. Then there are tokens, which are used to finance projects. I've been on the record saying there are very few, there's none that I've seen, tokens that aren't securities. To the extent something is a security, we should regulate it as a security…
Crypto industry welcomes the news
These statements were welcome news for those in the industry. Joe Lubin, a co-founder of Ethereum and the founder of CosenSys, a major Ethereum application company, says he is grateful for the SEC’s decision. Said Lubin in a statement:
We applaud the clarity provided by Director Hinman and the SEC today. Ether and other next-generation consumer utility tokens will continue evolving the web towards networks that are more fair, secure, and evenly distributed. ConsenSys looks forward to continuing to engage with regulators around the globe to promote responsible adoption of this transformative technology.”
Implications for early investors into crypto
In the same WIRED report, author Louise Matsakis further examines the distinction between cryptocurrencies that have achieved scale and early-stage crypto:
Hundreds of different developers run applications on top of the Ethereum network and contribute to its code. A similar number, if not more, help to develop Bitcoin.
Peter Van Valkenburgh, the director of research at Coin Center, a think tank focused on policy issues facing blockchain technology, says:
The network and the software development is sufficiently decentralized that there isn't a discernible third party upon whom we would really expect investors to be reliant. That's an important distinction from traditional securities, like Apple or Microsoft stock, in which you're betting on a specific company's efforts to develop products and services and generate income.
But what does this mean for early investors into new cryptocurrencies, where they are essentially doing the same thing that Matsakis describes - “betting on a specific company's efforts to develop products and services and generate income”?
The WIRED report continues:
The SEC's Hinman notably stopped short of declaring that the initial investments made in ether weren't securities. It's possible that investments made early, before the currency became truly decentralized, could still be viewed as traditional investment vehicles.
The director was pretty clear to not be definitive about that activity," says Van Valkenberg, who also suggests that this indicates the people who got in first—and have likely made the most money—could someday face regulation. Hinman also said that other cryptocurrencies may become "sufficiently decentralized" in the future, to the point where "regulating the tokens or coins that function on them as securities may not be required."
Essentially, while these statements from the SEC are good news for investors into the major cryptocurrencies, it doesn't mean cryptocurrencies, ICOs, and the industry as a whole can evade scrutiny from US regulators.
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