Bill Hinman, Director of Corporate Finance at the United States Securities but also Exchange Commission, stated that ether does not qualify as a security.
Hinman spoke at the Yahoo Finance All Market Summit – Crypto. âBased 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,â he said.
Hinman listed the criteria the Commission applies when it classifies a financial instrument as a security. A third party must exert managerial or promotional effort on behalf of an enterprise. Investors must depend on that party for profit. Information asymmetry between promoters and purchasers must persist. âIf the network is sufficiently decentralized and purchasers no longer have a reasonable expectation that a third party will carry out entrepreneurial or managerial functions⦠when the efforts of the third party are no longer seen as key⦠material information asymmetry recedes,â he said. He added that the bitcoin and ethereum networks have reached that level of decentralization – no single promoter now drives either token.
Hinman offered no comment on XRP, the token issued by Ripple Labs. Critics argue that XRP meets the definition of a security because Ripple Labs promotes the token to banks for cross border transfers. Ripple Labs holds roughly sixty percent of the total XRP supply – its principals profit directly from price appreciation.
Hinman’s statement does not extend to tokens sold through initial coin offerings. SEC officials have repeatedly warned that most ICO tokens fall under federal securities law. Hinman explicitly excluded ether’s 2014 crowd sale from his analysis. SEC Chairman Jay Clayton has declined to draw a similar line for ICO tokens. The Commission therefore retains authority to pursue enforcement actions against tokens that constitute unregistered securities.
Trading or holding digital tokens involves substantial risk. The author does not recommend any specific cryptocurrency or ICO. Readers should consult a licensed financial professional before committing capital. The author held 0.21 bitcoin and 1 litecoin at the time of publication.