Ether is not a security, according to Bill Hinman, U.S. Securities and Exchange Commission Director of Corporate Finance.
“Based on my understanding of the present state of ether, the ethereum network, its decentralized structure, we believe current offers and sales of ether are not securities transactions,” he said at the Yahoo Finance All Market Summit: Crypto. After bitcoin, ether is the second most valuable cryptocurrency in the markets today and is referred to as the “gas” that powers ethereum’s blockchain. (See also: Joe Lubin Answers: Is Ether A Security?)
Hinman’s speech comes a day after SEC Chair Jay Clayton criticized initial coin offerings (ICO) tokens at an SEC all-hands meeting in Atlanta. “Much of what I have seen in the ICO or token or ICO space, is a security offering…I don’t know how much more clear I can be about it,” he told audiences. (See also: Is Ethereum A Security? SEC Chief Sows Confusion).
At today’s summit, Hinman provided a quick roundup of factors used to classify financial instruments as securities. According to him, efforts of a third party to manage and promote an enterprise and information asymmetry between promoters and investors (in that financial instrument) are important to making this determination. “If the network is sufficiently decentralized and purchasers no longer have a reasonable expectation that a third party will carry out entrepreneurial or managerial functions…moreover, when the efforts of the third party are no longer seen as key…material information asymmetry recedes,” he said, adding that the decentralized nature of bitcoin and ether’s network meant that third parties were no longer engaged in promoting them.
What About Ripple And Other Tokens?
While Hinman’s comment on ether’s status was upbeat, he did not speak about the status of the other important coin in crypto markets: XRP, Ripple’s cryptocurrency. Critics claim that XRP should be classified as a security because it is being actively promoted by a private institution (in this case, Ripple Labs) as a cryptocurrency for bank international transfers using Ripple’s technology. They also point to the fact that Ripple Labs promoters own 60% of all XRP in existence and, therefore, benefit from a spike in its price. (See also: ICO Tokens Are Securities: Former CFTC Chief).
Hinman’s comments also should not be construed as respite for ICO tokens, which have been repeatedly slammed by SEC officials. By specifically naming ether, Hinman also left the door open for other tokens to be classified as securities. He pointedly excluded ether’s fundraising method in assessing its status. In his comments, SEC Chair Clayton has made no such distinction about ICO tokens. Therefore, there is every possibility that the SEC will continue watching crypto markets and swoop down on tokens that it perceives to be security offerings.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.21 bitcoin and 1 Litecoin