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The SEC Confirms Ether is Not a Security, But What is the Opinion of the Blockchain Ecosystem?

After the Director of the Division of Corporation Finance of the United States Securities and Exchange Commission (SEC), William Hinman, a few days ago announced that ether (ETH) was not a financial security, various experts from the blockchain ecosystem started expressing their opinions regarding the subject.

Peter Van Valkenburgh, lawyer and the Director of research at the Coin Center Research Institute, said the declaration made by Hinman was a rational interpretation of the laws and was in line with previous statements of the SEC. In his opinion, this is good news for the decentralization.

Van Valkenburgh published an article back in April this year in which he affirmed the ether should not be considered as a security since there is no third party behind this cryptocurrency. After the declaration made by the SEC in the previous days, Valkenburgh was glad to hear the commission agrees with his analysis and gave the following statement for TheVerge.com: “We are glad the SEC agrees with our long held analysis of how securities law applies to decentralized cryptocurrency networks like Bitcoin and Ethereum. With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.”

This is what Van Valkenburgh wrote in his article: “As Gary Gensler, former Chairman of the CFTC, said today at the MIT Technology Review Business of Blockchain conference, ether might be classed as a security. His message is important; uncertainty abounds because of the flexible nature of the Howey test, which the SEC would employ to classify a token sale as an investment contract and therefore a security.

We believe, however, that ether, as it exists today, is not a security. Gensler himself suggested why this could be the case when he distinguished between the Ethereum Foundation in 2014 and the Foundation and the Ethereum network, as a whole, today. Reliance on the efforts of a promoter is a key prong of the Howey test. In a token presale there’s reliance on an issuer and maybe the Foundation in 2014 fits that bill. But today, the value of ether and the functionality of the Ethereum network is not reliant on the Foundation, rather it flows from the efforts of thousands of unaffiliated developers, miners, and users. That decentralization is hard to differentiate from Bitcoin’s, a cryptocurrency Gensler suggested is almost certainly not a security for the very reason we’re discussing: no discernable third party (no common enterprise) upon whom we rely for any expectation of profits.

As we’ve said before, it’s possible for a useful decentralized token to not be a security even if it originated in a pre-sale or ICO that qualified as securities issuance. Confusion here is reasonable because the law is complicated and our community keeps adopting less than helpful terminology and using it without precision.

Securities are legal relationships between issuers and investors. Securities are not the paper on which a contract or other legal relationship is printed; nor are securities the spreadsheet entries that demark fractional ownership of a business; nor are securities any of the ones and zeros the arrangement of which may represent the terms of the deal. Nor are securities the assets that are derived from an investment deal: just because Apple uses invested money to build iPhones doesn’t mean that the iPhones are securities.

And, no, a useful decentralized token itself, like ether, is not a security, regardless of how it was originally sold or how funds were originally raised to build it. Again, a security is the contractual relationship between issuer and investor, nothing more.”

Van Valkenburgh’s point of view is different than the opinion of Preston Byrne, a member of the Adam Smith Research Institute from the United Kingdom. Byrne wrote a post on his blog in which he said it was not clear to him how, according to the SEC, the tokens start their life as investment contracts and then they lose this character and thus successfully complying with the set goals during four years.

In his opinion, the decentralization taking place after reaching the goals of the initial coin offering (ICO) should not save the cryptocurrencies from previous transgressions. Byrne wrote: “Indeed, decentralization does not terminate the initial investment contract; it is the purpose and objective of the initial investment contract. Funding marketing efforts and becoming a decentralized cryptocurrency is the point of the exercise. To think otherwise is to effectively allow crypto-token systems to outrun regulation even if at their genesis they violated the laws. It does not take long for a cryptocurrency system to grow beyond the immediate control of its creators; even with Ethereum, it would have been very difficult, as a practical matter, for the system to be unilaterally controlled by the Ethereum Foundation or the core team mere days after the system launched (ignoring the DAO hard fork, which was the result of an at-the-time-unforeseeable cartel of most of the major economic interests in Eth trying to extricate themselves from a plainly absurd $150 million unregistered investment scheme, which also escaped scrutiny despite being a flagrant violation of U.S. securities laws and, presumably, the public offering rules in every jurisdiction in which DAO Tokens were sold).

“Decentralization” is, accordingly, not a good measure for deciding whether securities laws should apply to a scheme, as a scheme can become functionally decentralized fairly quickly merely by choosing an appropriately decentralized consensus algorithm. Today, that means proof-of-work.”

On the other hand, Marco Santori, the President and Chief Legal Officer of Blockchain, published a tweet on his official Twitter account his opinion: “1/ Now that I’ve had a minute digest: While yesterday’s SEC announcement was helpful clarity for the industry as a whole, it is really, remarkably, exceptionally bad news for a) custodial providers, b) exchanges and c) OTC desks who trade tokens today.”

Santori says the SEC gave very clear guidelines about what it considered to be a security, however, the majority of the tokens currently in circulation fall into this concept. As a consequence, the cryptocurrency exchanges, the OTC operators and custodial providers should first register as national cryptocurrency exchanges or alternative trading systems (ATS). Next, the should not accept non accredited users.

Brian Kelly, an investor from the blockchain ecosystem, said that CBOE, a company that is currently offering futures contracts based on Bitcoin, said the opinion expressed by the SEC removes the current obstacles when it comes to offering futures contracts in ether. However, it is important to mention that the statement made by Hinman was not an official statement of the SEC.

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