William Hinman, the Director of the Division of Corporation Finance of the Securities and Exchange Commission ("SEC") recently made remarks at a finance summit. In them, he stated that "current offers and sales of Ethers are not securities transactions."
This is big for crypto regulationy. Until now, we've only gotten guidance that Bitcoin isn't a security, and that every other token the SEC has seen is probably a security. But most of the initial coin offerings ("ICOs") that are brought to the SEC's attention are likely fraudulent. So there's got to be a good swath of tokens that are NOT securities, but veritable utilitarian assets.
Most in the crypto industry have anticipated that the SEC would give more guidance by planting a flag on Ethereum. The fact a director has publicly stated Ethereum is probably not a security is seriously seriously seriously great news.
Quick disclaimer - Hinman's statements do not reflect the SEC's final determination about Ethereum. As a Director, he is an influential person, but it's possible the SEC could ultimately come out the other way and say Ethereum is a security.
But ok, why is it such a big deal?
It's hard for the digital asset industry to develop when it knows regulation is aggressively ramping up. So Director Hinman's statements give us a better idea of the "utility-to-security" spectrum.
As Director Hinman notes, don't look at the token - look at the circumstances around it. Too many ICOs claim they're not securities because their digital assets can only be used for utilitarian purposes. That's misguided - instead, they should be asking if people are buying into their ICOs with the expectation of selling the digital assets for profit.
Based on Hinman's statements, the following suggest a digital asset is a security:
Digital Asset Conversion
Director Hinman said he doesn't believe Ethereum is currently a security. But he makes an interesting statement before that:
"putting aside the fundraising that accompanied the creation of Ether...."
In other words, the launch and funding of Ethereum may have been centralized enough that it should be considered a security.
But that means a digital asset can start as a security, and transition to non-security. This has been "theory" for a while, but Hinman's statements now strongly suggest it's the way forward.
Which points us to...
If Ethereum is ultimately not a security, Simple Agreements for Future Tokens ("SAFT") are viable. There's been a lot of FUD since the SEC is targeting SAFTs. As a result, thought leaders have questioned whether the SAFT is a viable tool. SAFTs were built so that they're securities on the front-end, and non-securities on the back-end.
But if the ultimate digital assets on the back-end are securities, there's no point in using a SAFT instead of a Simple Agreement for Future Equity ("SAFE"), and all the securities regulations it comes with on both the front- and back-end.
But Hinman's statements strongly suggest SAFTs are indeed viable - an investment can begin as a security, and convert to non-security digital assets.
If Ethereum is ultimately not a security, it's possible there can be crypto exchanges that only exchange utility tokens (note the word "exchange" and not "trade", as "trading" would be buying to profit).
If an exchange doesn't have any securities...then it may not have to adhere to all the regulations securities exchanges have to (you can read about how crypto exchanges are regulated here).
The next big line to be drawn in the sand? Ripple.
But the answer to whether XRP is a security might not come from the SEC...
Reginald Young is a licensed attorney at Cole-Frieman & Mallon LLP, a boutique law firm at the forefront of cryptocurrency investment funds in San Fransisco.
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