The Securities and Exchange Commission’s (SEC) leading authority on bitcoin, cryptocurrency and initial coin offerings (ICOs) has ruled that some well-known cryptocurrencies like bitcoin and Ethereum are not securities. However, the coins offered during initial coin offerings very likely are entirely — or mostly — securities, according to news from CNBC.
As such, they can expect to come under the regulatory control of the SEC and relevant securities laws.
“Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers,” William Hinman, head of the Division of Corporate Finance for the SEC, said in a speech at the Yahoo All Markets Summit: Crypto conference in San Francisco.
The specific issues, according to Hinman, hinge on the buyer’s expectations for the coin when purchased and whether the buyer expects that the coin will result in a payout from a third party (presumably from whom a buyer purchases the coin).
Said simply: If coin buyers are looking for a return on their asset, it is safe to assume the SEC will rule that piece of crypto a security.
That, he noted, will capture many, but not all, crypto assets in the market. He noted cryptocurrencies like bitcoin and Ethereum do not fall under SEC regulatory territory at this time. Bitcoin, he said, has no central party that determines its progress going forward. Ether is not a security because the Ethereum network is similarly decentralized.
Hinman did not, however, address the status of Ripple (XRP). Currently, that coin is the subject of a lawsuit that claims it is, in fact, a security.
Hinman did note that “over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required.”
There are ways ICOs can be alternately structured, Hinman said, that would knock it out of the range of being a security. For example, if the coins issued were designed to function as consumer items, intended for use in some context, instead of as an investment, that probably would not fall under the definition of being a security.
Investing in a book club or a golf club membership does not qualify as purchasing a security, and coin offerings with a membership model in mind for coins would likely be outside SEC jurisdiction.
Hinman defended the SEC’s strict interpretation of securities laws, noting, “There is excitement and a great deal of speculative interest around this new technology. Unfortunately, there also are cases of fraud.”
The path forward in regulation will likely be challenging, according to Hinman, because the territory is relatively new and there will be challenges in determining whether or not an ICO falls within a security law or not.
“We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use,” he said.
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