Chairman of the United States Securities and Exchange Committee, Jay Clayton, has put to rest some doubts about the status of tokens like Ethereum as a security, after he responded to a clarification request sent by advocacy group Coin Center. The clarification letter was co-signed by Congressman Ted Budd.
Last year, Director of the Division of Corporate Finance, William Hinman, made a statement saying that he believed that Ether is not a security:
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.
Questions arose as to whether this opinion was only held by the SEC staff or whether it was the official opinion of the regulatory body.
Thus, Congressman Budd of North Carolina and Coin Center asked Clayton to clarify, to which the SEC Chairman responded:
I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.
The Howey Test is applied to check if transactions are investment contracts. To pass the test and qualify as a security, the transaction must involve investment of money in a common enterprise with an expectation of profit from a third party.
Although he did not mention Ethereum by name, it is very likely he had it in mind when speaking about securities.
The debate about whether ETH is a security has been going on for some time, and if it were the case, it would be subject to securities laws, which lead to difficulties to its adoption, use and growth. Cryptocurrencies have been problematic in this regard, even prompting regulators to consider a change in definition.
The full letter can be viewed here.
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