The regulatory authorities have spoken
It should now be crystal clear whether or not Ethereum is a security.
According to The Securities Act of 1933, an investment contract needs to meet a three-part test in order to be considered a security.
- It must be an investment of money
- In a common enterprise
- With the expectation of earning a profit derived solely from the efforts of others
It’s a simple test that was designed in much simpler times, and it’s effectiveness for dealing with the highly complex and varied cryptocurrency asset class is coming under scrutiny.
Why it matters
The classification matters because when something is deemed a security, it comes under a regulatory compliance regime that the vast majority of crypto projects could never comply with.
Not because they’re doing anything wrong, but because the existing rules simply aren’t fit for purpose when it comes to crypto assets.
If regulators insist on imposing existing rules and requirements onto crypto rather than creating a new regime to account for fundamental differences, it would quite effectively ban this burgeoning industry from the US and cut off American investors from participation.
To be clear, it would not kill crypto.
But it would for sure disqualify America from influencing the evolution of these incredibly important technologies or benefiting from them.
Perfect clarity
In his testimony to Congress last week, SEC Chairman Gary Gensler repeated his stance that the crypto industry has been given perfect clarity as to whether or not Ethereum is a security.
Gensler used the word “clear” or some variation of it 52 times.
But rather than take his assertions at face value (as so many media outlets did in their coverage), I dug a bit deeper and found some of the original sources of this clarity.
Mostly in the form of writings and public statements on the subject from other senior government officials.
I’ve compiled my findings below.
Enjoy.
Exibit A: Chair of the CFTC, Rostin Behnam
“I can say for sure Bitcoin, which is the largest of the coins and has always been the largest regardless of the total market cap of the entire digital asset market capitalization, is a commodity. Ether as well. I have argued this before, my predecessors as well said it is a commodity.”
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Exibit B: Former Chair of the SEC, Jay Clayton
“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.”
— — — — — —
Exibit C: New York Attorney General, Letitia James
“The Tokens are securities because they each involve investments of money into a common enterprise with the expectation of profits due to the managerial efforts of the Tokens’ respective founders, developers, and management teams.”
— — — — — —
Exibit D: Also Letitia James (further down in the same document)
“Under both state and federal authority, ETH, LUNA, and UST are commodities.”
— — — — — —
Exibit E: SEC Commissioner, Hester Pierce
“A Token may be offered and sold initially as a security because it is wrapped in a transaction involving an investment contract, but the Token may later be offered and sold outside of an investment contract. For example, sales of a particular Token likely would not constitute sales of an investment contract if purchasers could no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts.”
— — — — — —
Exibit F: Director of the Division of Corporate Finance at the SEC, William Hinman
“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.”
— — — — — —
Exibit G: Chair of the SEC, Gary Gensler
“Ummm, I… I… it’s… actually all securities are commodities under the Commodity and Exchange Act, it’s that we’re excluded commodities, but I would agree that a security cannot also be an excluded commodity and an included commodity.”
So there you have it
The authorities have spoken.
May we the crypto industry go forth and prosper, with the perfect light of regulatory clarity guiding our path.
To be fair, this technology is at least as mystifying to most people as the workings of the internal combustion engine must have been back when the first Model T rattled down Main Street in 1908.
Back then, the federal government’s role in economics and commerce was small. There was no Federal Reserve and the entire Department of Justice was staffed by just 22 people.
Government was not at the helm, entrepreneurs were.
Men like Carnegie, Rockefeller, Vanderbilt, Edison and J.P. Morgan were free to experiment, make mistakes, push boundaries and compete.
One byproduct of that was an enormous amount of creative destruction, but another was the transformation of America into an industrial powerhouse that generated undreamed-of wealth for millions.
We were the city upon on a hill, standing strong and true, our glow held steady through any storm, the eyes of the world upon us.
Good times.
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Thanks for reading until the end. I work in crypto and think about it non-stop. You can find me on Twitter @danajwright_
